CORE MOLDING TECHNOLOGIES INC - Quarter Report: 2020 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
☑
QUARTERLY
OF
1934
For the quarterly period ended September
30, 2020
OR
☐
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
for the transition period from
Commission File Number
001-12505
CORE MOLDING TECHNOLOGIES, INC.
___________________________________________________________________________________
(Exact name of registrant as specified in its charter)
Delaware
31-1481870
(State or other jurisdiction
incorporation or organization)
(I.R.S. Employer Identification No.)
800 Manor Park Drive
,
Columbus
,
Ohio
43228-0183
(Address of principal executive office)
(Zip Code)
Registrant’s telephone number, including area code (
614
)
870-5000
N/A
_______________________________________________________________
Former name, former address and former fiscal year, if changed since last report.
Indicate by check mark whether the registrant (1)
has filed all reports required to be filed by Section
13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2)
has been subject to such filing requirements for the past 90
days.
Yes
☑
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted
pursuant to Rule
405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period
that the registrant was required to submit such files).
Yes
☑
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definition of “accelerated filer,” “large accelerated filer,” and “smaller reporting company,” in Rule
12b-
2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☑
(Do not check if a smaller
reporting company)
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company as defined in Rule
12b-2 of the Exchange Act. Yes
☐
☑
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Trading Symbol
Common Stock, par value $0.01
NYSE American LLC
CMT
As of November 6, 2020, the latest practicable date,
8,496,655
includes
524,782
2
Table of Contents
3
4
5
6
8
9
27
34
35
36
36
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37
37
37
38
39
3
Item 1. Financial Statements
Part I — Financial Information
Core Molding Technologies, Inc. and Subsidiaries
Consolidated Statements of Income (Loss)
(Unaudited)
Three months ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Net sales
$
59,873,000
$
74,655,000
$
161,705,000
$
228,168,000
Cost of sales
49,035,000
68,171,000
137,192,000
210,043,000
Gross margin
10,838,000
6,484,000
24,513,000
18,125,000
Selling, general and administrative expense
6,517,000
7,041,000
17,136,000
21,431,000
Goodwill impairment
—
4,100,000
—
4,100,000
Total expenses
6,517,000
11,141,000
17,136,000
25,531,000
Operating income (loss)
4,321,000
(4,657,000)
7,377,000
(7,406,000)
Other income and expense
Interest expense
966,000
1,113,000
3,338,000
2,878,000
Net periodic post-retirement benefit
(20,000)
(23,000)
(60,000)
(71,000)
Total other expense
946,000
1,090,000
3,278,000
2,807,000
Income (loss) before taxes
3,375,000
(5,747,000)
4,099,000
(10,213,000)
Income tax expense (benefit)
32,000
378,000
(4,933,000)
(452,000)
Net income (loss)
$
3,343,000
$
(6,125,000)
$
9,032,000
$
(9,761,000)
Net income (loss) per common share:
Basic
$
0.39
$
(0.78)
$
1.07
$
(1.25)
Diluted
$
0.39
$
(0.78)
$
1.07
$
(1.25)
See notes to unaudited consolidated financial statements.
4
Core Molding Technologies, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
Three months ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Net income (loss)
$
3,343,000
$
(6,125,000)
$
9,032,000
$
(9,761,000)
Other comprehensive income (loss):
Foreign currency hedging derivatives:
Unrealized hedge gain (loss)
415,000
(254,000)
(456,000)
539,000
Income tax benefit (expense)
(88,000)
58,000
98,000
(144,000)
Interest rate swaps:
Unrealized hedge gain (loss)
172,000
(87,000)
(550,000)
(809,000)
Income tax benefit (expense)
(39,000)
20,000
125,000
184,000
Post retirement benefit plan adjustments:
Net actuarial gain
46,000
28,000
136,000
88,000
Prior service costs
(124,000)
(122,000)
(372,000)
(372,000)
Income tax benefit
17,000
20,000
50,000
60,000
Comprehensive income (loss)
$
3,742,000
$
(6,462,000)
$
8,063,000
$
(10,215,000)
See notes to unaudited consolidated financial statements.
5
Core Molding Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30,
2020
December 31,
(Unaudited)
2019
Assets:
Current assets:
Cash and cash equivalents
$
14,809,000
$
1,856,000
Accounts receivable, net
26,306,000
32,424,000
Inventories, net
15,233,000
21,682,000
Income tax receivable
2,657,000
652,000
Prepaid expenses and other current assets
3,688,000
4,611,000
Total current assets
62,693,000
61,225,000
Right of use asset
3,506,000
4,484,000
Property, plant and equipment, net
75,207,000
79,206,000
Goodwill
17,376,000
17,376,000
Intangibles, net
12,003,000
13,464,000
Other non-current assets
3,215,000
3,551,000
Total Assets
$
174,000,000
$
179,306,000
Liabilities and Stockholders’ Equity:
Current liabilities:
Current portion of long-term debt
$
2,753,000
$
49,451,000
Accounts payable
17,949,000
19,910,000
Contract liabilities
2,745,000
3,698,000
Compensation and related benefits
6,450,000
5,515,000
Accrued other liabilities
7,101,000
5,260,000
Total current liabilities
36,998,000
83,834,000
Long-term debt
31,537,000
—
Other non-current liabilities
3,962,000
3,119,000
Post retirement benefits liability
7,974,000
7,927,000
Total Liabilities
$
80,471,000
$
94,880,000
Commitments and Contingencies
—
—
Stockholders’ Equity:
Preferred stock — $0.01 par value, authorized shares — 10,000,000; no shares outstanding at
September 30, 2020 and December 31, 2019
—
—
Common stock — $0.01 par value, authorized shares – 20,000,000; outstanding shares: 7,971,873 at
September 30, 2020 and 7,877,945 at December 31, 2019
80,000
79,000
Paid-in capital
35,831,000
34,772,000
Accumulated other comprehensive income (loss), net of income taxes
401,000
1,370,000
Treasury stock - at cost, 3,810,929 at September 30, 2020 and 3,806,355 at December 31, 2019
(28,521,000)
(28,501,000)
Retained earnings
85,738,000
76,706,000
Total Stockholders’ Equity
93,529,000
84,426,000
Total Liabilities and Stockholders’ Equity
$
174,000,000
$
179,306,000
See notes to unaudited consolidated financial statements.
6
Core Molding Technologies, Inc. and Subsidiaries
Consolidated Statement of Stockholders’ Equity
(Unaudited)
For the three months ended September
30, 2019:
Common Stock
Outstanding
Accumulated
Other
Total
Paid-In
Comprehensive
Treasury
Retained
Stockholders'
Shares
Amount
Capital
Income
Stock
Earnings
Equity
Balance at June 30, 2019
7,854,736
$
79,000
$
34,074,000
$
2,001,000
$
(28,463,000)
$
88,293,000
$
95,984,000
Net loss
(6,125,000)
(6,125,000)
Change in post retirement
benefits, net of tax benefit
of $20,000
(75,000)
(75,000)
Unrealized foreign currency
hedge loss, net of tax
benefit of $58,000
(196,000)
(196,000)
Change in interest rate
swaps, net of tax benefit
of $20,000
(67,000)
(67,000)
Share-based compensation
398,000
398,000
Balance at September 30,
2019
7,854,736
$
79,000
$
34,472,000
$
1,663,000
$
(28,463,000)
$
82,168,000
$
89,919,000
For the nine months ended September
30, 2019:
Common Stock
Outstanding
Accumulated
Other
Total
Paid-In
Comprehensive
Treasury
Retained
Stockholders'
Shares
Amount
Capital
Income
Stock
Earnings
Equity
Balance at December 31,
2018
7,776,164
$
78,000
$
33,208,000
$
2,117,000
$
(28,403,000)
$
91,929,000
$
98,929,000
Net loss
(9,761,000)
(9,761,000)
Change in post retirement
benefits, net of tax
benefit of $60,000
(225,000)
(225,000)
Unrealized foreign currency
hedge gain, net of tax of
$144,000
396,000
396,000
Change in interest rate
swaps, net of tax benefit
of $184,000
(625,000)
(625,000)
Purchase of treasury stock
(7,744)
(60,000)
(60,000)
Restricted stock vested
86,316
1,000
1,000
Share-based compensation
1,264,000
1,264,000
Balance at September 30,
2019
7,854,736
$
79,000
$
34,472,000
$
1,663,000
$
(28,463,000)
$
82,168,000
$
89,919,000
7
For the three months ended September
30, 2020:
Common Stock
Outstanding
Accumulated
Other
Total
Paid-In
Comprehensive
Treasury
Retained
Stockholders'
Shares
Amount
Capital
Income
Stock
Earnings
Equity
Balance at June 30, 2020
7,965,289
$
80,000
$
35,476,000
$
2,000
$
(28,501,000)
$
82,395,000
$
89,452,000
Net income
3,343,000
3,343,000
Change in post retirement
benefits, net of tax
benefit of $17,000
(61,000)
(61,000)
Unrealized foreign currency
hedge gain, net of tax
of $88,000
327,000
327,000
Change in interest rate
swaps, net of tax
of $39,000
133,000
133,000
Purchase of treasury stock
(4,574)
(20,000)
(20,000)
Restricted stock vested
11,158
Share-based compensation
355,000
355,000
Balance at September 30,
2020
7,971,873
$
80,000
$
35,831,000
$
401,000
$
(28,521,000)
$
85,738,000
$
93,529,000
For the nine months ended September
30, 2020:
Common Stock
Outstanding
Accumulated
Other
Total
Paid-In
Comprehensive
Treasury
Retained
Stockholders'
Shares
Amount
Capital
Income
Stock
Earnings
Equity
Balance at December 31, 2019
7,877,945
$
79,000
$
34,772,000
$
1,370,000
$
(28,501,000)
$
76,706,000
$
84,426,000
Net income
9,032,000
9,032,000
Change in post retirement
benefits, net of tax
benefit of $50,000
(186,000)
(187,000)
Unrealized foreign currency
hedge loss, net of tax
benefit of $98,000
(358,000)
(358,000)
Change in interest rate
swaps, net of tax benefit
of $125,000
(425,000)
(424,000)
Purchase of treasury stock
(4,574)
(20,000)
(20,000)
Restricted stock vested
98,502
1,000
1,000
Share-based compensation
1,059,000
1,059,000
Balance at September 30,
2020
7,971,873
$
80,000
$
35,831,000
$
401,000
$
(28,521,000)
$
85,738,000
$
93,529,000
See notes to unaudited consolidated financial statements.
8
Core Molding Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
2020
2019
Cash flows from operating activities:
Net income (loss)
$
9,032,000
$
(9,761,000)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization
8,425,000
7,700,000
Deferred income tax
517,000
(632,000)
Goodwill impairment
—
4,100,000
Share-based compensation
1,059,000
1,264,000
Losses (gains) on foreign currency translation
203,000
(22,000)
Change in operating assets and liabilities:
Accounts receivable
6,118,000
(378,000)
Inventories
6,449,000
2,352,000
Prepaid and other assets
(747,000)
1,900,000
Accounts payable
(2,053,000)
(2,505,000)
Accrued and other liabilities
2,238,000
253,000
Post retirement benefits liability
(189,000)
(298,000)
Net cash provided by operating activities
31,052,000
3,973,000
Cash flows from investing activities:
Purchase of property, plant and equipment
(2,716,000)
(6,280,000)
Net cash used in investing activities
(2,716,000)
(6,280,000)
Cash flows from financing activities:
Gross repayments on revolving line of credit
(59,356,000)
(148,679,000)
Gross borrowings on revolving line of credit
47,349,000
152,121,000
Proceeds from term loan
175,000
—
Payment of principal on term loans
(3,391,000)
(2,532,000)
Payment of deferred loan costs
(140,000)
(434,000)
Payments related to the purchase of treasury stock
(20,000)
(60,000)
Net cash provided by (used in) financing activities
(15,383,000)
416,000
Net change in cash and cash equivalents
12,953,000
(1,891,000)
Cash and cash equivalents at beginning of period
1,856,000
1,891,000
Cash and cash equivalents at end of period
$
14,809,000
$
—
Cash paid for:
$
3,523,000
$
2,706,000
$
467,000
$
1,160,000
Non-cash investing activities:
Fixed asset purchases in accounts payable
$
146,000
$
429,000
See notes to unaudited consolidated financial statements.
9
Core Molding Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form
10-Q and include all of the information and disclosures required by accounting principles generally accepted in the United States
of America for interim reporting, which are less than those required for annual reporting. In the opinion of management, the
accompanying unaudited consolidated financial statements contain all adjustments (all of which are normal and recurring in
nature) necessary to present fairly the financial position of Core Molding Technologies, Inc. and its subsidiaries (“Core Molding
Technologies” or the “Company”) at September
30, 2020, and the results of operations and cash flows for the nine months ended
September
30, 2020. The Company has reclassified certain prior-year amounts to conform to the current-year's presentation. The
“Notes to Consolidated Financial Statements” contained in the Company's Annual Report on Form 10-K for the year ended
December
31, 2019, should be read in conjunction with these consolidated financial statements.
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 produces and sells molded products for varied markets, including medium
and heavy-duty trucks, automobiles, marine, construction and other commercial markets. 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 has its
headquarters in Columbus, Ohio, and operates seven production facilities in Columbus and Batavia, Ohio; Gaffney, South
Carolina; Winona, Minnesota; Matamoros and Escobedo, Mexico; and Cobourg, Ontario, Canada. All production facilities
produce structural composite products.
2. CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities,
disclosures of contingent assets and liabilities, and reported amounts of revenues and expenses during the reporting period. On
an on -going basis, management evaluates its estimates and judgments. 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, due to the uncertainty around the magnitude and duration of the COVID-
19 pandemic, as well as other factors.
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.
Going Concern:
to evaluate conditions or events as related to uncertainties that raise substantial doubt about the Company’s ability to continue as
a going concern and to provide related financial disclosures, as applicable. As of September 30, 2020, the Company was in default
under the Company's Amended and Restated Credit Agreement, dated January 16, 2018 (the “A/R Credit Agreement”), with
KeyBank National Association as the administrative agent (the "Administrative Agent") and various other financial institutions
thereto as lenders (the "Lenders") as discussed in Note 11, “Debt”. As a result of the default, the Lenders requested that the
Company seek alternative financing, which caused uncertainty about the Company’s future liquidity and raised substantial doubt
about the Company’s ability to continue as a going concern.
10
On October 27, 2020, the Company entered into a credit agreement and a master security agreement (the “Refinancing
Agreements”) with Wells Fargo Bank, National Association and FGI Equipment Finance LLC, respectively, as discussed in Note
16, “Subsequent Events”, and repaid all of its obligations under the A/R Credit Agreement. Management believes that the
Refinancing Agreements will provide sufficient liquidity to sustain the Company’s needs for the next 12 months. The closing of
the Refinancing Agreements alleviated the substantial doubt about the Company’s ability to continue as a going concern prior to
the filing date of our Form 10-Q, see Note 16, “Subsequent Events”.
Revenue Recognition:
revenue is earned from the manufacture and sale of sheet molding compound and thermoset and thermoplastic products. Revenue
from product sales is generally recognized as products are shipped, as the Company transfers title and risk of ownership to the
customer and is entitled to payment. In limited circumstances, the Company recognizes revenue from product sales when products
are produced and the customer takes title and risk of ownership at the Company's production facility.
Tooling revenue is earned from manufacturing tools, molds and assembly equipment as part of a tooling program for a customer.
Given that the Company is providing a significant service of producing highly interdependent component parts of the tooling
program, each tooling program consists of a single performance obligation to provide the customer the capability to produce a
single product. Based on the arrangement with the customer, the Company recognizes revenue either at a point in time or over
time. When the Company does not have an enforceable right to payment, the Company recognizes tooling revenue at a point in
time. In such cases, the Company recognizes revenue upon customer acceptance, which is when the customer has legal title to
the tools.
Certain tooling programs include an enforceable right to payment. In those cases, the Company recognizes revenue over time
based on the extent of progress towards completion of its performance obligation. The Company uses a cost-to -cost measure of
progress for such contracts because it best depicts the transfer of value to the customer and also correlates with the amount of
consideration to which the entity expects to be entitled in exchange for transferring the promised goods or services to the customer.
Under the cost-to-cost measure of progress, progress towards completion is measured based on the ratio of costs incurred to date
to the total estimated costs at completion of the performance obligation. Revenues are recorded proportionally as costs are
incurred.
Accounts Receivable Allowances:
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 $
130,000
50,000
30, 2020 and December
31, 2019,
respectively.
Management also records an allowance for estimated customer chargebacks for returns, price discounts and adjustments, premium
freight and expediting costs and customer production line disruption costs resulting from late deliveries. At times, customers have
asserted a right to significant production line disruption charges to recover damages as a result of late delivery. The Company
typically works with its customers to minimize disruption charges, validate damages and negotiate resolution. The Company
records accruals for customer chargebacks when a valid charge is probable and the amount of the charge can be reasonably
estimated. Should customer chargebacks fluctuate from the estimated amounts, additional allowances may be necessary. The
Company reduced accounts receivable for chargebacks by $
105,000
30, 2020 and $
476,000
31, 2019.
Inventories:
realizable value. 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 $
726,000
30, 2020 and $
898,000
31, 2019.
11
Contract Assets/Liabilities:
Contract assets and liabilities represent the net cumulative customer billings, vendor payments and
revenue recognized for tooling programs. For tooling programs where net revenue recognized and vendor payments exceed
customer billings, the Company recognizes a contract asset. For tooling programs where net customer billings exceed revenue
recognized and vendor payments, the Company recognizes a contract liability. Customer payment terms vary by contract and can
range from progress payments based on work performed or one single payment once the contract is completed. The Company
has recorded contract assets of $
343,000
30, 2020, and $
888,000
31, 2019. Contract assets are
generally classified as current within prepaid expenses and other current assets on the Consolidated Balance Sheets. For the nine
months ended September
30, 2020, the Company recognized
no
September 30, 2020, the Company recognized $
5,710,000
outstanding as of December 31, 2019.
Income Taxes:
2,026,000
Canadian and Mexican tax jurisdictions and a net non-current deferred tax liability of $
517,000
September 30, 2020. The Company evaluates the balance of deferred tax assets that will be realized based on the premise that the
Company is more likely than not to realize deferred tax benefits through the generation of future taxable income. For more
information, refer to Note 12, "Income Taxes", of the Notes to Consolidated Financial Statements contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 2019.
Derivative Instruments:
Derivative instruments are utilized to manage exposure to fluctuations in foreign currency exchange
rates and interest rates on long term debt obligations. All derivative instruments are formally documented as cash flow hedges
and are recorded at fair value at each reporting period. Gains and losses related to currency forward contracts and interest rate
swaps are deferred and recorded as a component of Accumulated Other Comprehensive Income (Loss) in the Consolidated
Statement of Stockholders' Equity and then subsequently recognized in the Consolidated Statement of Income (Loss) when the
hedged item affects net income. The ineffective portion of the change in fair value of a hedge, if any, is recognized in income.
For additional information on derivative instruments, see Note 14, "Fair Value of Financial Instruments".
Long-Lived Assets:
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
long-lived assets for the nine months ended September
30, 2020 or September
30, 2019.
Goodwill and Other Intangibles:
31
to determine whether impairment
exists, or at interim periods if an indicator of possible impairment exists. As a result of the Horizon Plastics acquisition on
January
16, 2018 and the status of its integration, the Company established
two
reporting units, Core Traditional and Horizon
Plastics. The annual impairment tests of goodwill may be completed through qualitative assessments, however the Company
may elect to bypass the qualitative assessment and proceed directly to a quantitative impairment test for any reporting unit in any
period. The Company may resume the qualitative assessment for any reporting unit in any subsequent period.
Due to the Company's financial performance and continued depressed stock price, the Company performed a quantitative analysis
for both of its reporting units at September 30, 2019. During 2019, the Company incurred a loss of margin in its Horizon Plastics
reporting unit caused by selling price decreases that the Company has not been able to fully offset with material cost reductions.
As a result of the quantitative analysis, the Company concluded that the carrying value of Horizon Plastics was greater than the
fair value, which resulted in a goodwill impairment charge of $
4,100,000
19
% of the goodwill
related to the Horizon Plastics reporting unit.
There were no indicators of impairment for the nine months ended September 30, 2020 that would trigger additional analysis;
however, should the Company experience a prolonged suspension of operations due to COVID-19, the Company may incur
goodwill and intangible impairment charges in the future.
12
Self-Insurance:
Minnesota 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 is also self -insured for dental and vision with
respect to its Cobourg, Canada location. The Company has recorded an estimated liability for self-insured medical, dental, vision
and worker’s compensation claims incurred but not reported at September
30, 2020 and December
31, 2019 of $
807,000
$
1,203,000
Post-retirement Benefits:
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 13, "Post Retirement
Benefits", of the Notes to Consolidated Financial Statements contained in the Company's Annual Report on Form 10-K for the
year ended December
31, 2019. Core Molding Technologies had a liability for post retirement healthcare benefits based on
actuarially computed estimates of $
9,207,000
30, 2020 and $
9,160,000
31, 2019.
Government Subsidies
:
25,000
1,416,000
months ended September 30, 2020. The Company accounted for government subsidies in accordance with International
Accounting Standards 20, Accounting for Government Grants and Disclosure of Government Assistance. The Company recorded
the assistance in selling, general and administrative expenses and determined that there is reasonable assurance all conditions
attached to the assistance were met and the grants would be received. The government subsidies consisted of the Canadian
Emergency Wage Subsidy, Employee Retention Credit under the Cares Act and the Shared Work Programs of Ohio, South
Carolina and Minnesota.
3. RECENT ACCOUNTING PRONOUNCEMENTS
Current expected credit loss (CECL)
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments -Credit Losses,” which changes the impairment model for
most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and
other instruments, entities will be required to use a new forward-looking “expected loss” model that will replace today’s “incurred
loss” model and generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with
unrealized losses, entities will measure credit losses in a manner similar to current practice, except that the losses will be
recognized as an allowance. Subsequent to issuing ASU 2016 -13, the FASB issued ASU 2018-19, “Codification Improvements
to Topic 326, Financial Instruments - Credit Losses,” for the purpose of clarifying certain aspects of ASU 2016 -13. ASU 2018-
19 has the same effective date and transition requirements as ASU 2016 -13. In April 2019, the FASB issued ASU 2019 -04,
“Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic
825, Financial Instruments, ” which is effective with the adoption of ASU 2016-13. In May 2019, the FASB issued ASU 2019-
05, “Financial Instruments - Credit Losses (Topic 326),” which is also effective with the adoption of ASU 2016-13. In November
2019, the FASB voted to delay the implementation date for certain companies, including those that qualify as a smaller reporting
company under SEC rules, until fiscal years beginning after December 15, 2022. We will adopt this ASU on its effective date of
January 1, 2023. We do not expect the adoption of this ASU to have a material impact on our consolidated financial position,
results of operations, cash flows, or presentation thereof.
Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued ASU 2019-12, Income Taxes – Simplifying the Accounting for Income Taxes. This guidance
is intended to simplify various aspects of income tax accounting including the elimination of certain exceptions related to the
approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of
deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise
taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis
of goodwill. The Company adopted the new standard effective January 1, 2020 during the third quarter with no material impact
13
on our consolidated financial statements. Adoption of this guidance requires certain changes to primarily be made prospectively,
with some changes to be made retrospectively.
Facilitation of the Effects of Reference Rate Reform
In March 2020, the FASB issued ASU No. 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting
(Topic 848). The ASU provides optional expedients and exceptions for applying GAAP to transactions affected by reference rate
(e.g., LIBOR) reform if certain criteria are met, for a limited period of time to ease the potential burden in accounting for (or
recognizing the effects of) reference rate reform on financial reporting. The ASU is effective as of March 12, 2020 through
December 31, 2022. We will evaluate transactions or contract modifications occurring as a result of reference rate reform and
determine whether to apply the optional guidance on an ongoing basis.
4. NET INCOME (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per share using the two-class method for amounts
attributable to the Company's common shares. The Company uses the two-class method to calculate basic and diluted earnings
per share as a result of outstanding participating securities in the form of restricted stock awards.
Three months ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Net income (loss)
$
3,343,000
$
(6,125,000)
$
9,032,000
$
(9,761,000)
Less: net income allocated to participating securities
206,000
—
558,000
—
Net income (loss) available to common shareholders
$
3,137,000
$
(6,125,000)
$
8,474,000
$
(9,761,000)
Weighted average common shares outstanding — basic
7,969,000
7,851,000
7,922,000
7,804,000
Effect of dilutive securities
—
—
—
—
Weighted average common and potentially issuable
common shares outstanding — diluted
7,969,000
7,851,000
7,922,000
7,804,000
Basic net income (loss) per common share
$
0.39
$
(0.78)
$
1.07
$
(1.25)
Diluted net income (loss) per common share
$
0.39
$
(0.78)
$
1.07
$
(1.25)
14
5. MAJOR CUSTOMERS
The Company had five major customers during the nine months ended September 30, 2020, Universal Forest Products, Inc.
(“UFP”), Navistar, Inc. (“Navistar ”), PACCAR, Inc. (“PACCAR”), Volvo Group North America, LLC (“Volvo”), and BRP, Inc.
(“BRP”). Major customers are defined as customers whose sales individually consist of more than ten percent of total sales during
any annual or interim reporting period in the current year. The loss of a significant portion of sales to these customers would have
a material adverse effect on the business of the Company.
The following table presents sales revenue for the above -mentioned customers for the three and nine months ended September
30, 2020 and 2019:
Three months ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
UFP product sales
$
12,188,000
$
6,751,000
$
30,659,000
$
22,076,000
UFP tooling sales
—
—
—
—
Total UFP sales
12,188,000
6,751,000
30,659,000
22,076,000
Navistar product sales
8,065,000
15,115,000
25,231,000
46,411,000
Navistar tooling sales
5,198,000
145,000
6,384,000
927,000
Total Navistar sales
13,263,000
15,260,000
31,615,000
47,338,000
PACCAR product sales
8,268,000
11,532,000
19,383,000
35,779,000
PACCAR tooling sales
179,000
165,000
386,000
1,325,000
Total PACCAR sales
8,447,000
11,697,000
19,769,000
37,104,000
Volvo product sales
4,907,000
11,117,000
14,647,000
40,213,000
Volvo tooling sales
38,000
61,000
2,186,000
200,000
Total Volvo sales
4,945,000
11,178,000
16,833,000
40,413,000
BRP product sales
4,240,000
3,116,000
13,693,000
11,287,000
BRP tooling sales
175,000
2,502,000
508,000
3,358,000
Total BRP sales
4,415,000
5,618,000
14,201,000
14,645,000
Other product sales
16,572,000
19,880,000
48,406,000
58,637,000
Other tooling sales
43,000
4,271,000
222,000
7,955,000
Total other sales
16,615,000
24,151,000
48,628,000
66,592,000
Total product sales
54,240,000
67,511,000
152,019,000
214,403,000
Total tooling sales
5,633,000
7,144,000
9,686,000
13,765,000
Total sales
$
59,873,000
$
74,655,000
$
161,705,000
$
228,168,000
6. INVENTORY
Inventories, net consisted of the following:
September 30, 2020
December 31, 2019
Raw materials
$
9,871,000
$
13,041,000
Work in process
1,536,000
1,818,000
Finished goods
3,826,000
6,823,000
Total
$
15,233,000
$
21,682,000
15
Inventory quantities on-hand are regularly reviewed, and where necessary, provisions for excess and obsolete inventory are
recorded based on historical and anticipated usage.
7. LEASES
The Company has operating leases with fixed payment terms for certain buildings and warehouses. The Company's leases have
remaining lease terms of less than
one year
four years
, some of which include options to extend the lease for
five years
.
Operating leases are included in operating lease right -of-use ("ROU") assets, accrued other liabilities and other non-current
liabilities in the Consolidated Balance Sheets. ROU assets represent our right to use an underlying asset for the lease term and
lease liabilities represent our obligation to make lease payments arising from the lease.
The Company used the applicable incremental borrowing rate at implementation date to measure lease liabilities and ROU assets.
The incremental borrowing rate used by the Company was based on baseline rates and adjusted by the credit spreads
commensurate with the Company ’s secured borrowing rate. At each reporting period when there is a new lease initiated, the
Company will utilize its incremental borrowing rate to perform lease classification tests on lease components and to measure
ROU assets and lease liabilities.
The components of lease expense were as follows:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Operating lease cost
$
357,000
$
358,000
$
1,072,000
$
1,073,000
Total net lease cost
$
357,000
$
358,000
$
1,072,000
$
1,073,000
Other supplemental balance sheet information related to leases was as follows:
September 30, 2020
December 31, 2019
Operating leases:
Operating lease right of use assets
$
3,506,000
$
4,484,000
Total operating lease right of use assets
$
3,506,000
$
4,484,000
Current operating lease liabilities
(A)
$
843,000
$
1,304,000
Noncurrent operating lease liabilities
(B)
2,602,000
3,119,000
Total operating lease liabilities
$
3,445,000
$
4,423,000
Weighted average remaining lease term (in years):
Operating leases
3.5
4.0
Weighted average discount rate:
Operating leases
5.0
%
4.9
%
16
(A)
Current operating lease liabilities are included in
accrued other liabilities
(B)
Noncurrent operating lease liabilities are included in
other non-current liabilities
Sheets.
Other information related to leases were as follows:
Nine Months Ended
September 30,
2020
2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases
(C)
$
1,072,000
$
1,073,000
(C)
As of September
30, 2020, maturities of lease liabilities were as follows:
Operating Leases
2020 (remainder of year)
$
358,000
2021
1,174,000
2022
1,102,000
2023
1,000,000
2024
530,000
4,164,000
Less: imputed interest
(719,000)
3,445,000
Less: current obligations
(843,000)
$
2,602,000
As of December
31, 2019, maturities of lease liabilities were as follows:
Operating Leases
2020
$
1,433,000
2021
1,174,000
2022
1,102,000
2023
1,000,000
2024
530,000
5,239,000
Less: imputed interest
(816,000)
4,423,000
Less: current obligations
(1,304,000)
$
3,119,000
17
8. PROPERTY, PLANT & EQUIPMENT
Property, plant and equipment, net consisted of the following for the periods specified:
September 30, 2020
December 31, 2019
Property, plant and equipment
$
173,644,000
$
170,881,000
Accumulated depreciation
(98,437,000)
(91,675,000)
Property, plant and equipment — net
$
75,207,000
$
79,206,000
Property, plant, and equipment are recorded at cost, unless obtained through acquisition, then assets are recorded at estimated fair
value at the date of acquisition. Depreciation is provided on a straight -line method over the estimated useful lives of the assets.
The carrying amount of long-lived assets is evaluated annually to determine if an adjustment to the depreciation period or to the
unamortized balance is warranted. Depreciation expense for the three months ended September 30, 2020 and 2019 was
$2,273,000 and $1,977,000, respectively. Depreciation expense for the nine months ended September 30, 2020 and 2019 was
$6,764,000 and $5,115,000, respectively. Amounts invested in capital additions in progress were $1,858,000 and $1,615,000 at
September 30, 2020 and December 31, 2019, respectively. At September 30, 2020 and December 31, 2019, purchase
commitments for capital expenditures in progress were $338,000 and $336,000, respectively.
9. GOODWILL AND INTANGIBLES
Goodwill activity for the nine months ended September
30, 2020 consisted of the following:
Balance at December 31, 2019
$
17,376,000
Additions
—
Impairment
—
Balance at September 30, 2020
$
17,376,000
Intangibles, net at September
30, 2020 were comprised of the following:
Definite-lived Intangible Assets
Amortization Period
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Trade name
25 Years
$
250,000
$
(56,000)
$
194,000
Trademarks
10 Years
1,610,000
(435,000)
1,175,000
Non-competition agreement
5 Years
1,810,000
(981,000)
829,000
Developed technology
7 Years
4,420,000
(1,709,000)
2,711,000
Customer relationships
10-12 Years
9,330,000
(2,236,000)
7,094,000
Total
$
17,420,000
$
(5,417,000)
$
12,003,000
The aggregate intangible asset amortization expense was $487,000 for the three months ended September 30, 2020 and 2019.
The aggregate intangible asset amortization expense was $1,461,000 for the nine months ended September 30, 2020 and 2019.
Intangibles, net at December
31, 2019 were comprised of the following:
18
Definite-lived Intangible Assets
Amortization Period
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Trade name
25 Years
$
250,000
$
(48,000)
$
202,000
Trademarks
10 Years
1,610,000
(315,000)
1,295,000
Non-competition agreement
5 Years
1,810,000
(709,000)
1,101,000
Developed technology
7 Years
4,420,000
(1,237,000)
3,183,000
Customer relationships
10-12 Years
9,330,000
(1,647,000)
7,683,000
Total
$
17,420,000
$
(3,956,000)
$
13,464,000
10. POST RETIREMENT BENEFITS
The components of expense for the Company’s post-retirement benefit plans for the three and nine months ended September
30,
2020 and 2019 are as follows:
Three months ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Pension expense:
Multi-employer plan
$
157,000
$
270,000
$
549,000
$
732,000
Defined contribution plan
258,000
364,000
766,000
950,000
Total pension expense
415,000
634,000
1,315,000
1,682,000
Health and life insurance:
Interest cost
59,000
72,000
177,000
216,000
Amortization of prior service costs
(124,000)
(125,000)
(372,000)
(375,000)
Amortization of net loss
45,000
30,000
135,000
88,000
Net periodic benefit cost
(20,000)
(23,000)
(60,000)
(71,000)
Total post retirement benefits expense
$
395,000
$
611,000
$
1,255,000
$
1,611,000
The Company made payments of $1,518,000 to pension plans and $131,000 for post-retirement healthcare and life insurance
during the nine months ended September 30, 2020. For the remainder of 2020, the Company expects to make approximately
$276,000 of pension plan payments, of which $98,000 was accrued at September 30, 2020. The Company also expects to make
approximately $1,102,000 of post-retirement healthcare and life insurance payments for the remainder of 2020, all of which were
accrued at September 30, 2020.
19
11. DEBT
Debt consists of the following:
September 30,
December 31,
2020
2019
Term loans, interest at a variable rate (8.0% at September 30, 2020 and 6.30% at
December 31, 2019) with monthly payments of interest and quarterly payments of
principal through January 2023
$
34,875,000
$
38,250,000
Revolving loans, interest at a variable rate (8.0% at September 30, 2020 and 6.04% at
December 31, 2019)
—
12,008,000
Term loan, interest at a fixed rate (5.5% at September 30, 2020) with monthly payments
of interest and principal through April 2025
160,000
—
Total
35,035,000
50,258,000
Less deferred loan costs
(745,000)
(807,000)
Less current portion
(2,753,000)
(49,451,000)
Long-term debt
$
31,537,000
$
—
Credit Agreement
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 “ US 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 US 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 A/R 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 $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 700 basis points with a LIBOR floor of 100 basis points.
During 2019, the Company 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). On November 22, 2019, the Company and the Lenders entered into a forbearance agreement (the
"Forbearance Agreement"), which was amended twice, first on March 13, 2020 (the "Amended Forbearance Agreement") and
then on May 29, 2020 (the “Second Amended Forbearance Agreement”).
The Second Amended Forbearance Agreement provided that the Company and the Lenders agreed to modify certain terms of the
Amended Forbearance Agreement and extend the Forbearance Agreement through September 30, 2020. The modifications
include (1) that the Company will maintain liquidity of not less than $5,000,000, to be measured twice monthly, on every second
and fourth Friday of each month during the forbearance period, (2) the Company shall maintain minimum year-to-date earnings
before income tax, depreciation and amortization (“YTD-EBITDA”) of not less than $5,000,000, measured upon delivery of
Company’s July 2020 financial statements and also upon delivery of Company’s August 2020 financial statements, with YTD-
20
EBITDA determined based on consolidated EBITDA, (3) a change of interest rate to LIBOR rate plus 700 basis points with a
LIBOR floor of 100 basis points, (4) on or before July 15, 2020 the Borrowers shall have obtained executed term sheets from
involved parties and/or lenders, (5) on or before September 30, 2020, the Borrowers shall have closed on a new capital structure,
(6) forbearing compliance with the leverage covenant and fixed charge covenant through September 30, 2020, and (7)
implementation of a capital expenditure spend limit of $3,000,000 for the nine months ended September 30, 2020.
The Company has unblocked maximum availability of $20,000,000 of variable rate revolving loans of which $0 is outstanding
as of September 30, 2020.
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 5.5% and a term of 60 months. The amount outstanding at September 30, 2020 was
$160,000 of which, $127,000 was classified as long term debt.
On October 27, 2020, the Company entered into the Refinancing Agreements, as defined in Note 2, “Critical Accounting Policies
and Estimates ”, and repaid all of its obligations under the A/R Credit Agreement. Management believes that the Refinancing
Agreements will provide sufficient liquidity to sustain the Company’s needs for the next 12 months. The closing of the
Refinancing Agreements alleviated the substantial doubt about the Company’s ability to continue as a going concern prior to the
filing date of our Form 10 -Q, see Note 16, “Subsequent Event”. The Company, therefore, classified its debt between short -term
and long-term in accordance with the A/R Credit Agreement.
Interest Rate Swaps
The Company entered into two interest rate swap agreements that became effective January 18, 2018 and continue through
January 2023, one of which was designated as a cash flow hedge for $25,000,000 of the $32,000,000 term loan to the Company
mentioned above and the other designated as a cash flow hedge for $10,000,000 of the $13,000,000 term loan to the Subsidiary
mentioned above. Under these agreements, the Company will pay a fixed rate of approximately 2.49% to the counterparty and
receives 30 day LIBOR for both cash flow hedges. The fair value of the interest rate swap was a liability of $1,255,000 and
$706,000 at September 30, 2020 and December 31, 2019, respectively. On October 27, 2020, concurrent with the Company
entering into the Refinancing Agreements, both interest rate swap agreement were terminated, see Note 16, “Subsequent Events”.
12. INCOME TAXES
The Company’s Consolidated Balance Sheets include a net non-current deferred tax asset of $2,026,000 for the Canadian and
Mexican tax jurisdictions and a net non -current deferred tax liability of $517,000 for the U.S. tax jurisdiction at September 30,
2020. The Company evaluates the balance of deferred tax assets that will be realized based on the premise that the Company is
more likely than not to realize deferred tax benefits through the generation of future taxable income. As of September 30, 2020
and December 31, 2019, the Company had no liability for unrecognized tax benefits. The Company does not anticipate that
unrecognized tax benefits will significantly change within the next twelve months.
Income tax benefit for the nine months ended September 30, 2020 is estimated to be $4,933,000, approximately 120.3% of income
before income taxes. The effective tax rate for 2020 reflects recording net operating losses in U.S. jurisdictions at the tax rate,
34%, which will be applied when the Company carries 2020 losses back to previous years.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was enacted in response to the
COVID-19 pandemic, and among other things, provides tax relief to businesses. Tax provisions of the CARES Act include the
deferral of certain payroll taxes, relief for retaining employees, and other provisions, including allowing net operating losses to
be carried back five years versus an indefinite carryforward. The Company has filed with the Internal Revenue Service to carry
back net operating losses incurred in 2018 and 2019 under this new law, resulting in an income tax refund of $6,155,000 of which
all has been collected as of September 30, 2020. An income tax benefit of $5,638,000 was realized in the first quarter of 2020.
The income tax benefit consists of the reversal of the full valuation allowance against net deferred tax assets in the United States
for approximately $3,267,000. The income tax benefit also consists of a rate benefit of $2,371,000 based on the losses being
21
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 files income tax returns in the U.S., Mexico, Canada and various state jurisdictions. The Company is not subject
to U.S. federal and state income tax examinations by tax authorities for years prior to 2016, not subject to Mexican income tax
examinations by Mexican authorities for years prior to 2014 and not subject to Canadian tax examinations by Canadian authorities
for years prior to 2018.
13. STOCK BASED COMPENSATION
The Company has a Long Term Equity Incentive Plan (the “2006 Plan”), as approved by the Company’s stockholders in May
2006 and as amended in May 2015. The 2006 Plan allows for grants to directors and employees of non -qualified stock options,
incentive stock options, stock appreciation rights, restricted stock, performance shares, performance units and other incentive
awards (“Stock Awards”) up to an aggregate of 3,000,000 awards, each representing a right to buy a share of Core Molding
Technologies common stock. Stock Awards can be granted under the 2006 Plan through the earlier of December 31, 2025, or the
date the maximum number of available awards under the 2006 Plan have been granted.
Restricted Stock
The Company grants shares of its common stock to certain directors, officers, key managers and employees in the form of unvested
stock and units (“Restricted Stock”). These awards are recorded at the market value of the Company's common stock on the date
of issuance and amortized ratably as compensation expense over the applicable vesting period, which is typically three years. The
Company adjusts compensation expense for actual forfeitures, as they occur.
The following summarizes the status of Restricted Stock and changes during the nine months ended September 30, 2020:
Weighted Average
Number of
Grant Date
Shares
Fair Value
Unvested balance at December 31, 2019
343,919
$
9.37
Granted
287,750
4.62
Vested
(98,502)
10.37
Forfeited
(8,385)
13.72
Unvested balance at September 30, 2020
524,782
$
6.46
At September 30, 2020 and 2019, there was $1,928,000 and $2,377,000, respectively, of total unrecognized compensation
expense, related to Restricted Stock granted under the 2006 Plan. That cost is expected to be recognized over the weighted-
average period of 2.3 years. Total compensation cost related to restricted stock grants for the three months ended Septe mber 30,
2020 and 2019 was $319,000 and $350,000, respectively, all of which was recorded to selling, general and administrative expense.
Total compensation cost related to restricted stock grants for the nine months ended September 30, 2020 and 2019 was $968,000
and $1,121,000, respectively, all of which was recorded to selling, general and administrative expense
During the nine months ended September 30, 2020 and 2019, employees surrendered 4,574 shares and 7,744 shares of the
Company's common stock to satisfy income tax withholding obligations in connection with the vesting of restricted awards.
Stock Appreciation Rights
As part of the Company's 2019 annual grant, Stock Appreciation Rights ("SARs") were granted with a grant price of $10. These
awards have a contractual term of five years and vest ratably over a period of three years or immediately vest if the recipient is
over 65 years of age. These awards are valued using the Black-Scholes option pricing model.
A summary of the Company's stock appreciation rights activity for the nine months ended September 30, 2020 is as follows:
22
Weighted Average
Number of
Grant Date
Shares
Fair Value
Outstanding as of December 31, 2019
222,112
$
2.57
Granted
—
—
Exercised
—
—
Forfeited
(27,266)
2.57
Outstanding at end of the period ended September 30, 2020
194,846
$
2.57
Exercisable at end of the period ended September 30, 2020
84,300
$
2.57
The average remaining contractual term for those SARs outstanding at September 30, 2020 is 3.6 years, with no aggregate
intrinsic value. At September 30, 2020 and 2019, there was $225 ,000 and $435,000, respectively, of total unrecognized
compensation expense, net of estimated forfeitures, related to SARs. Total compensation cost related to SARs for the three months
ended September 30 , 2020 and 2019 was $36,000 and $42,000, respectively, all of which was recorded to selling, general and
administrative expense. Total compensation cost related to SARs for the nine months ended September 30 , 2020 and 2019 was
$91,000 and $145,000, respectively, all of which was recorded to selling, general and administrative expense. That cost is
expected to be recognized over the weighted- average period of 1.6 years.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in a transaction between
market participants as of the measurement date. Fair value is measured using the fair value hierarchy and related valuation
methodologies as defined in the authoritative literature. This guidance provides a fair value framework that requires the
categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities.
Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment.
The three levels are defined as follows:
Level 1 -
Quoted prices in active markets for identical assets and liabilities.
Level 2 -
Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in
markets that are not active and model-derived valuations, in which all significant inputs are observable in
active markets.
Level 3 -
Significant unobservable inputs reflecting management's own assumptions about the inputs used in pricing
the asset or liability.
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, debt, interest
rate swaps and foreign currency derivatives. Cash and cash equivalents, accounts receivable and accounts payable carrying values
as of September 30, 2020 and December 31, 2019 approximate fair value due to the short -term maturities of these financial
instruments. The carrying amounts of long-term debt and the revolving line of credit approximate fair value as of September 30,
2020 and December 31, 2019 due to the short term nature of the underlying variable rate LIBOR agreements. The Company had
Level 2 fair value measurements at September 30, 2020 and December 31, 2019 relating to the Company’s interest rate swaps
and foreign currency derivatives.
Derivative and hedging activities
Foreign Currency Derivatives
The Company conducted business in foreign countries and paid certain expenses in foreign currencies; therefore, the Company
was exposed to foreign currency exchange risk between the U.S. Dollar and foreign currencies, which could impact the
23
Company’s operating income and cash flows. To mitigate risk associated with foreign currency exchange, the Company entered
into forward contracts to exchange a fixed amount of U.S. Dollars for a fixed amount of foreign currency, which will be used to
fund future foreign currency cash flows. At inception, all forward contracts are formally documented as cash flow hedges and are
measured at fair value each reporting period.
Derivatives are formally assessed both at inception and at least quarterly thereafter, to ensure that derivatives used in hedging
transactions are highly effective in offsetting changes in cash flows of the hedged item. If it is determined that a derivative ceases
to be a highly effective hedge, or if the anticipated transaction is no longer probable of occurring, hedge accounting is
discontinued, and any future mark-to-market adjustments are recognized in earnings. The effective portion of gain or loss is
reported in other comprehensive income and the ineffective portion is reported in earnings. The impacts of these contracts were
largely offset by gains and losses resulting from the impact of changes in exchange rates on transactions denominated in the
foreign currency. As of September
30, 2020, the Company had no ineffective portion related to the cash flow hedges.
Interest Rate Swaps
The Company entered into interest rate swap contracts to fix the interest rate on an initial aggregate amount of $35,000,000
thereby reducing exposure to interest rate changes. The interest rate swap pays a fixed rate of 2.49% to the counterparty and
receives 30 day LIBOR for both cash flow hedges. At inception, all interest rate swaps were formally documented as cash flow
hedges and are measured at fair value each reporting period. See Note 11, "Debt", for additional information.
Financial statements impacts
The following tables detail amounts related to our derivatives designated as hedging instruments:
Fair Value of Derivative Instruments
September 30, 2020
Asset Derivatives
Liability Derivatives
Balance Sheet Location
Fair Value
Balance Sheet Location
Fair Value
Foreign exchange contracts
Prepaid expenses other current assets
$
—
Accrued other liabilities
$
4,000
Notional contract values
$
—
$
51,000
Interest rate swaps
Prepaid expenses other current assets
$
—
Accrued other liabilities
$
1,255,000
Notional swap values
$
—
$
27,125,000
December 31, 2019
Asset Derivatives
Liability Derivatives
Balance Sheet Location
Fair Value
Balance Sheet Location
Fair Value
Foreign exchange contracts
Prepaid expenses other current assets
$
452,000
Accrued other liabilities
$
—
Notional contract values
$
15,358,000
$
—
Interest rate swaps
Prepaid expenses other current assets
$
—
Accrued other liabilities
$
706,000
Notional swap values
$
—
$
29,750,000
24
The following tables summarize the amount of unrealized and realized gain (loss) recognized in Accumulated Other
Comprehensive Income (Loss) ("AOCI") for the three months ended September 30, 2020 and 2019:
Amount of Unrealized
Derivatives in
Gain (Loss) Recognized
Location of Gain (Loss)
Amount of Realized Gain
subtopic 815-20
in Accumulated Other
Reclassified from
(Loss) Reclassified from
Cash Flow Hedging
Comprehensive Income (Loss) on
Accumulated Other
Accumulated Other
Relationship
Derivative
Comprehensive Income (Loss)
(A)
Comprehensive Income (Loss)
2020
2019
2020
2019
Foreign exchange
contracts
$
668,000
$
(192,000)
Cost of goods sold
$
(219,000)
$
55,000
Selling, general and
administrative expense
$
(33,000)
$
8,000
Interest rate swaps
$
321,000
$
(101,000)
Interest expense
$
(149,000)
$
(14,000)
(A)
The foreign currency derivative activity reclassified from Accumulated Other Comprehensive Income (Loss) is allocated
to cost of goods sold and selling, general and administrative expense based on the percentage of foreign currency spend.
The following tables summarize the amount of unrealized and realized gain (loss) recognized in Accumulated Other
Comprehensive Income (Loss) ("AOCI") for the nine months ended September 30, 2020 and 2019:
Amount of Unrealized
Derivatives in
Gain (Loss) Recognized
Location of Gain (Loss)
Amount of Realized Gain
subtopic 815-20
in Accumulated Other
Reclassified from
or (Loss) Reclassified from
Cash Flow Hedging
Comprehensive Income (Loss)
on
Accumulated Other
Accumulated Other
Relationship
Derivative
Comprehensive Income (Loss)
(A)
Comprehensive Income (Loss)
2020
2019
2020
2019
Foreign exchange
contracts
$
135,000
$
649,000
Cost of goods sold
$
(525,000)
$
110,000
Selling, general and
administrative expense
$
(67,000)
$
—
Interest rate swaps
$
(206,000)
$
(823,000)
Interest expense
$
(343,000)
$
(13,000)
(A)
The foreign currency derivative activity reclassified from Accumulated Other Comprehensive Income (Loss) is allocated
to cost of goods sold and selling, general and administrative expense based on the percentage of foreign currency spend.
25
15. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table presents changes in Accumulated Other Comprehensive Income (Loss), net of tax, for the nine months ended
September
30, 2020 and 2019:
Accumulated
Derivative
Post Retirement
Other
Hedging
Benefit Plan
Comprehensive
2019:
Activities
Items
(A)
Income (Loss)
Balance at December 31, 2018
$
(612,000)
$
2,729,000
$
2,117,000
Other comprehensive loss before
reclassifications
(174,000)
—
(174,000)
Amounts reclassified from accumulated
other comprehensive income (loss)
(96,000)
(284,000)
(380,000)
Income tax benefit
40,000
60,000
100,000
Balance at September 30, 2019
$
(842,000)
$
2,505,000
$
1,663,000
2020:
Balance at December 31, 2019
$
(191,000)
$
1,561,000
$
1,370,000
Other comprehensive loss before
reclassifications
(71,000)
—
(71,000)
Amounts reclassified from accumulated
other comprehensive income (loss)
(935,000)
(236,000)
(1,171,000)
Income tax benefit
223,000
50,000
273,000
Balance at September 30, 2020
$
(974,000)
$
1,375,000
$
401,000
(A)
other income and expense on the Consolidated Statements of Income (Loss). These Accumulated Other Comprehensive Income
(Loss) components are included in the computation of net periodic benefit cost (see Note 10, "Post Retirement Benefits" for
additional details). The tax effect of post-retirement benefit items reclassified from Accumulated Other Comprehensive Income
(Loss) is included in income tax expense on the Consolidated Statements of Income (Loss).
16. SUBSEQUENT EVENTS
26
Credit Refinancing
On
October 27, 2020
, the Company entered into a Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National
Association, as administrative agent, lead arranger and book runner, and the lenders party thereto (the “Lenders”). Pursuant to
the terms of the Credit Agreement, the Lenders made available to the Company secured loans (the “ Wells Fargo Loans ”) in the
maximum aggregate principal amount of $
43,500,000
, consisting of (i) a revolving loan commitment of $
25,000,000
(approximately $
8,745,000
$
18,500,000
16,790,000
terminates, and all outstanding borrowings thereunder must be repaid, on
October 27, 2024
, and such term loans are to be repaid
in
monthly
October 27, 2024
, in each case subject to certain optional
and mandatory repayment terms. The Company’s obligations under the Credit Agreement and the Loans are unconditionally
guaranteed by each of the Company’s U.S. and Canadian subsidiaries, with such obligations of the Company and such subsidiaries
being secured by a lien on substantially all of their U.S. and Canadian assets. Interest is payable monthly and is based on either
LIBOR Rate or Base Rate, as defined by the Credit Agreement, at the discretion of the Company. As of October 28, 2020, the
revolving loan was based on the
Base Rate
4.75
% and the term loan was based on the
LIBOR Rate
in a rate of
3.75
%.
In connection with the funding of the Wells Fargo Loans, FGI Equipment Finance LLC advanced to the Company, pursuant to a
Master Security Agreement, dated as of
October 27, 2020
Company as debtor, and each of Core Composites Corporation and CC HPM, S. de R.L. de C.V. as a guarantor, a term loan in
the principal amount of $
13,200,000
guarantors located in Mexico. Interest is payable
monthly
8.25
%.
The proceeds of the Wells Fargo Loans and the FGIEF Loans were used in part to repay all existing outstanding indebtedness of
the Company owing to KeyBank National Association, and to pay certain fees and expenses associated with the transactions
contemplated by the Credit Agreement and the Security Agreement, and will be used to finance the ongoing general corporate
needs of the Company.
Concurrent with the closing of the Credit Agreement and the Master Security Agreement, the Company settled both outstanding
interest rate swaps, which resulted in a loss and cash outflow of $
1,253,000
, recorded in interest expense and operating activities,
respectively. The Company also recorded losses of $
605,000
Amended A/R Credit Agreement.
Facility Closure
On November 5, 2020 the Company announced it will close the manufacturing facility located in Batavia, Ohio in 2021. The
Company has begun working with customers to relocate the business into other Core locations or to third parties.
the facility accounts for less than
5
% of the Company's total revenues and the Company anticipates approximately half of those
revenues will transition to other Core locations. The Company anticipates shutdown costs to consist of severance cost, moving
and production testing and recertification costs and asset impairment charges. Management has determined the costs related to
the closure of the manufacturing facility located in Batavia, Ohio to be immaterial to the Company’s consolidated financial
statements.
27
Part I — Financial Information
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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. 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 char ges; 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.
28
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. Product sales from the Company's largest market, the North American truck market, which is highly
cyclical, accounted for 42% and 60% of the Company’s product revenue for the nine months ended September 30, 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
29
Company gains experience with new tools and processes. Therefore, during a new program launch period, start-up costs and
inefficiencies can affect operating results.
Nine Months Ended September
30, 2020
Product sales for the nine months ended September 30, 2020 decreased 29% compared to the same period in 2019. Operating
income increased from a loss of $7,406,000 to income of $7, 377,000 for the nine months ended September 30, 2020 compared
to the same period a year ago. Lower demand from our customers as a result of a cyclical downturn in the truck market and
the negative effect of COVID-19 on most customer demand were the primary drivers of the sales decrease. The increase in
operating income was largely due to improved manufacturing efficiencies and cost savings at several of the Company's facilities.
The Company also incurred lower operating and SG&A cost s.
For the nine months ended September 30, 2020, product sales to truck customers decreased by 45% compared to the same period
in 2019, as a result of a cyclical downturn in the truck market and demand deterioration related to COVID-19. According to ACT
Research, North American heavy-duty truck production decreased approximately 47% for the nine months ended September 30,
2020 compared to the same period in 2019.
For the nine months ended September 30, 2020, the Company recorded net income of $9,032 ,000 or $1.07 per basic and diluted
share, compared with net loss of $9,761,000, or ($1.25) per basic and diluted share for the nine months ended September 30,
2019. Net income in 2020 was favorably impacted by $5,638,000, or $0.69 per share, as a result of a tax valuation allowance
reversal and a tax rate benefit due to tax law changes that allow the Company to carryback net operating losses to offset taxable
income in 2013 through 2015 and the tax rate change of 21% to 34% .
Looking forward, the Company anticipates lower product sales for 2020 when compared to 2019, due to the negative impact of
customer shutdowns as a result of COVID-19 and lower demand from truck customers. Based on customer forecasts, the
Company anticipates product sales demand to be down slightly for the three months ended December 31, 2020 when compared
to the same period ended December 31, 2019
Results of Operations
Three Months Ended September
30, 2020, as Compared to Three Months Ended September
30, 2019
Net sales for the three months ended September 30, 2020 and 2019 totaled $59,873,000 and $74,655,000, respectively. Included
in net sales were tooling project sales of $5,663,000 and $7,144,000 for the three months ended September 30, 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 September 30, 2020 were $54,240,000 compared to
$67,511,000 for the same period in 2019. This decrease in sales is primarily the result of lower demand from truck and marine
customers partially offset by higher demand from customers in the construction and all-terrain vehicle market.
Gross margin was approximately 18.1 % of sales for the three months ended September 30, 2020, compared with 8.7% for the
three months ended September 30, 2019. The gross margin percentage increase was due to a favorable net change in product mix
and productivity efficiency of 11.9%, offset by an increase in sales return of 2.0% and lower leverage of fixed costs of 1.0%.
Selling, general and administrative expense (“SG&A”) was $6,517,000 for the three months ended September 30, 2020, compared
to $7,041,000 for the three months ended September 30, 2019. Decreased SG&A expenses resulted primarily from lower
professional and outside service expenses of $272,000 and travel expenses of $157,000.
The Company incurred a goodwill impairment of $4,100,000 associated with its Horizon Plastics reporting unit during the three
months ended September 30, 2019. The Company incurred lower profit margins in its Horizon Plastics reporting unit caused by
selling price decreases that the Company had not been able to fully offset with material cost reductions.
30
Interest expense totaled $966,000 for the three months ended September 30, 2020, compared to interest expense of $1,113,000
for the three months ended September 30, 2019. The decrease in interest expense was due to a lower average outstanding debt
balance, offset by higher interest rates during the three months ended September 30, 2020, when compared to the same period in
2019.
Income tax expense for the three months ended September 30, 2020 was 1.0% of income before income taxes, and income tax
for the three months ended September 30, 2019 was 6.6% of loss before income taxes. The Company’s effective tax rates reflect
the effects of taxable income and taxable losses being generated in tax jurisdictions with different tax rates. The effective tax rate
for 2020 reflects recording net operating losses in US jurisdictions at the tax rate which will be applied when the Company carries
2020 losses back to previous tax years.
The Company recorded net income for the three months ended September 30, 2020 of $3,343,000 or $0.39 per basic and diluted
share, compared with a net loss of $6,125,000, or $0.78 per basic and diluted share, for the three months ended September 30,
2019.
Comprehensive income totaled
$3,742,000 for the three months ended September 30, 2020, compared to
comprehensive losses
of $6,462,000
for the same period ended September 30, 2019. The increase was primarily related to an increase in net income of
$9,468,000 and a change in unrealized foreign currency hedges of $ 523,000, net of tax.
Nine Months Ended September
30, 2020, as Compared to Nine Months Ended September
30, 2019
Net sales for the nine months ended September 30, 2020 and 2019 totaled $161,705,000 and $228,168,000, respectively.
Included in total sales were tooling project sales of $9,686,000 and $13,765,000 for the nine months ended September 30, 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 nine months ended September 30, 2020 were $152,019,000
compared to $214,403,000 for the same period in 2019. This decrease in sales is primarily the result of lower cyclical demand
from truck customers as well as lower demand from most all customers as a result of COVID -19.
Gross margin was approximately 15 .2% of sales for the nine months ended September 30, 2020, compared with 7.9% for the
nine months ended September 30, 2019. The gross margin percentage increase was due to favorable net change in product mix
and manufacturing efficiency of 8.9% and a favorable net change in selling price and material costs of 1.1%, offset by lower
leverage of fixed costs of 2.1% and higher sales returns of 0.9%.
Selling, gener al and administrative expense (“SG&A”) was $17,136,000 for the nine months ended September 30, 2020,
compared to $21,431,000 for the nine months ended September 30, 2019. The decrease in SG&A expense primarily resulted from
lower professional and outside services of $1,417,000, government subsides enacted as a result of COVID-19 of $1,416,000 and
lower travel expenses of $619,000.
The Company incurred a goodwill impairment of $4,100,000 associated with its Horizon Plastics reporting unit during the nine
months ended September 30, 2019. The Company incurred lower profit margins in its Horizon Plastics reporting unit caused by
selling price decreases that the Company had not been able to fully offset with material cost reductions.
Interest expense totaled $3,338,000 for the nine months ended September 30, 2020, compared to interest expense of $2,878,000
for the nine months ended September 30, 2019. The increase in interest expense was due to higher interest rates during the nine
months ended September 30, 2020, when compared to the same period in 2019.
Income tax benefit for the nine months ended September 30, 2020 was 120.3% of the income before income taxes, and income tax
benefit for the nine months ended September 30, 2019 was 4.4% of the loss before income taxes. The Company’s effective tax
rates reflect the effects of taxable income and taxable losses being generated in tax jurisdictions with different tax rates.
31
The Company recorded a net income for the nine months ended September 30, 2020 of $9,032,000, or $1.07 per basic and diluted
share, compared with a net loss of $9.761,000 or $1.25 per basic and diluted share, for the nine months ended September 30,
2019.
Comprehensive income totaled
$8,063,000 for the nine months ended September 30, 2020, compared to
comprehensive losses
of $10,215,000
for the same period ended September 30, 2019. The increase was primarily related to higher net income of
$18,793,000 and a change in unrealized foreign currency hedges of $753,000, net of tax, for the nine months ended September
30, 2020.
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, 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 September 30, 2020, the Company had
outstanding foreign exchange contracts with notional amounts totaling $51,000, compared to $15,358,000 outstanding as of
December 31, 2019. As of September 30, 2020, the Company also had outstanding interest rate swaps with notional amounts
totaling $27,125,000, compared to $29,750,000 outstanding as of December 31, 2019.
Cash provided by operating activities for the nine months ended September 30, 2020 totaled $31,052,000. Net income of
$9,032,000 positively impacted operating cash flows. Non-cash deductions of depreciation and amortization included in net
income amounted to $8,425,000. Changes in working capital increased cash provided by operating activities by $11,816,000,
which primarily related to changes in accounts receivable, inventory and other accrued liabilities, offset by accounts payable.
At September 30, 2020, the Company had $14,809,000 cash on hand, and an available balance on the revolving line of credit of
$20,000,000. 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 nine months ended September 30, 2020 was $2,716,000, which related to purchases of
property, plant and equipment. The Company anticipates spending up to $2,000,000 during the remainder of 2020 on property,
plant and equipment purchases for all of the Company's operations.
At September 30, 2020, purchase commitments for capital expenditures in progress were $338,000. 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 nine months ended September 30, 2020 totaled $15,383,000, which primarily consisted
of net revolving loan payments of $12,007,000 and net scheduled repayments of principal on outstanding term loans of
$3,391,000. The Company was able to make the repayments primarily due to the cash provided by operating activities of the
$15,399,000 for the nine months ended of September 30, 2020.
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 “ US 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 US Revolving Loans to the Company on a dollar-for-dollar basis) and term
32
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 A/R 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 $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 700 basis points with a LIBOR floor of 100 basis points.
During 2019, the Company 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). On November 22, 2019, the Company and the Lenders entered into a forbearance agreement (the
"Forbearance Agreement"), which was amended twice, first on March 13, 2020 agreement (the "Amended Forbearance
Agreement") and then on May 29, 2020 (the “Second Amended Forbearance Agreement”).
The Second Amended Forbearance Agreement provided that the Company and the Lenders agreed to modify certain terms of the
Amended Forbearance Agreement and extend the Forbearance Agreement through September 30, 2020. The modifications
include (1) that the Company will maintain liquidity of not less than $5,000,000, to be measured twice monthly, on every second
and fourth Friday of each month during the forbearance period, (2) the Company shall maintain minimum year-to-date earnings
before income tax, depreciation and amortization (“YTD-EBITDA”) of not less than $5,000,000, measured upon delivery of
Company’s July 2020 financial statements and also upon delivery of Company’s August 2020 financial statements, with YTD-
EBITDA determined based on consolidated EBITDA, (3) a change of interest rate to LIBOR rate plus 700 basis points with a
LIBOR floor of 100 basis points, (4) on or before July 15, 2020 the Borrowers shall have obtained executed term sheets from
involved parties and/or lenders, (5) on or before September 30, 2020, the Borrowers shall have closed on a new capital structure,
(6) forbearing compliance with the leverage covenant and fixed charge covenant through September 30, 2020, and (7)
implementation of a capital expenditure spend limit of $3,000,000 for the nine months ended September 30, 2020.
The Company has unblocked maximum availability of $20,000,000 of variable rate revolving loans of which $0 is outstanding
as of September 30, 2020.
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 550 basis point and a term of 60 months. The amount outstanding at September 30, 2020
was $160,000 of which, $127,000 was classified as long term debt.
On October 27, 2020, the Company entered into the Refinancing Agreements, as defined in Note 2, “Critical Accounting Policies
and Estimates”, and repaid all of its obligations under the A/R Credit Agreement. Management believes that existing cash, cash
flow from operating activities and available borrowings under the Refinancing Agreements will be sufficient to meet the
Company’s liquidity needs for the next 12 months. Based on the Company ’s forecasts, which are based on industry analysts’
estimates of heavy and medium-duty truck production volumes, customers' forecasts, 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. 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.
Off-Balance Sheet Arrangements
The Company did not have any significant off-balance sheet arrangements as of September 30, 2020 or December 31, 2019.
33
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 September 30, 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 here
34
Part I — Financial Information
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
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 may use 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)
Revolving Loans and Term Loans
under the Amended and Restated Credit Agreement, some of which bear a variable interest rate; (2) 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 have been impacted, as
the interest rate on these loans is based upon LIBOR. It would not, however, have a material effect on earnings before tax.
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.
35
Part I — Financial Information
Item 4.
Controls and Procedures
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.
36
Part II — Other Information
Legal Proceedings
From time to time, the Company is involved in litigation incidental to the conduct of its business. The Company is presently not
involved in any legal proceedings which in the opinion of management are likely to have a material adverse effect on the
Company's consolidated financial position or results of operations.
Risk Factors
The following risk factor supplements the “Risk Factors” section in Part 1, Item 1A, of our Annual Report on Form 10-K for the
fiscal year ended December 31, 2019 (our “Form 10-K"). The following risk factor disclosure should be read in conjunction with
the other risk factors set out in our Form 10-K.
The Recent Coronavirus (COVID-19) Outbreak Has Adversely Impacted our Business and Could in the Future Have a Material
Adverse Impact on our Business, Results of Operation, Financial Condition and Liquidity, the Nature and Extent of Which
is Highly Uncertain
The global outbreak of the coronavirus (COVID-19) has significantly increased economic, demand and operational uncertainty.
We have global operations, customers and suppliers, including in countries most impacted by COVID-19. Authorities around
the world have taken a variety of measures to slow the spread of COVID-19, including travel bans or restrictions, increased
border controls or closures, quarantines, shelter-in-place orders and business shutdowns and such authorities may impose
additional restrictions. We have also taken actions to protect our employees and to mitigate the spread of COVID-19, including
embracing guidelines set by the World Health Organization and the Centers for Disease Control and Prevention on social
distancing, good hygiene, restrictions on employee travel and in-person meetings, and changes to employee work arrangements
including remote work arrangements where feasible. The actions taken around the world to slow the spread of COVID-19 have
also impacted our customers and suppliers, and future developments could cause further disruptions to the Company due to the
interconnected nature of our business relationships.
The impact of COVID-19 on the global economy and our customers has negatively impacted demand for our products and could
continue to do so in the future. Its effects could also result in further disruptions to our manufacturing operations, including higher
rates of employee absenteeism, and supply chain disruption, which could continue to negatively impact our ability to meet
customer demand. Additionally, the potential deterioration and volatility of credit and financial markets could limit our ability
to obtain external financing. The extent to which COVID-19 will impact our business, results of operations, financial condition
or liquidity is highly uncertain and will depend on future developments, including the spread and duration of the virus, potential
actions taken by governmental authorities, and how quickly economic conditions stabilize and recover.
Unregistered Sales of Equity Securities and Use of Proceeds
Period
Total Number of
Shares Purchased
Average Price
Paid per Share
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
Maximum Number that
May Yet be Purchased
Under the Plans or
Programs
July 1 to 30, 2020
3,788
4.61
—
—
August 1 to 31, 2020
—
—
—
—
September 1 to 30, 2020
—
—
—
—
Defaults Upon Senior Securities
None.
37
Mine Safety Disclosures
None.
Other Information
None.
Item 6.
See Index to Exhibits.
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
CORE MOLDING TECHNOLOGIES, INC.
Date:
November
6, 2020
By:
/s/ David L. Duvall
David L. Duvall
President, Chief Executive Officer, and Director
Date:
November
6, 2020
By:
/s/ John P. Zimmer
John P. Zimmer
39
INDEX TO EXHIBIT
Exhibit No.
Description
Location
2(a)(1)
Asset Purchase Agreement dated as of September
12,
1996, as amended October
31, 1996, between Navistar
and RYMAC Mortgage Investment Corporation
1
2(a)(2)
Second Amendment to Asset Purchase Agreement
dated December
16, 1996
1
2(b)(1)
Agreement and Plan of Merger dated as of
November
1, 1996, between Core Molding
Technologies, Inc. and RYMAC Mortgage Investment
Corporation
2(b)(2)
First Amendment to Agreement and Plan of Merger
dated as of December
27, 1996 between Core Molding
Technologies, Inc. and RYMAC Mortgage Investment
Corporation
2(c)
Asset Purchase Agreement dated as of October
10,
2001, between Core Molding Technologies, Inc. and
Airshield Corporation
2(d)
Asset Purchase Agreement dated as of March
20,
2015, between Core Molding Technologies, Inc and
CPI Binani, Inc.
2(e)
Asset Purchase Agreement dated as of January
16,
2018 between 1137952 B.C. Ltd., Horizon Plastics
International, Inc., 1541689 Ontario Inc., 2551024
Ontario Inc., Horizon Plastics de Mexico, S.A. de C.V.,
and Brian Read
3(a)(1)
Certificate of Incorporation of Core Molding
Technologies, Inc. as filed with the Secretary of State
of Delaware on October
8, 1996
3(a)(2)
Certificate of Amendment of Certificate of
Incorporation of Core Molding Technologies, Inc. as
filed with the Secretary of State of Delaware on
November
6, 1996
3(a)(3)
Certificate of Amendment of Certificate of
Incorporation as filed with the Secretary of State of
Delaware on August
28, 2002
3(a)(4)
Certificate of Designation, Preferences and Rights of
Series
A Junior Participating Preferred Stock as filed
with the Secretary of State of Delaware on July
18,
2007
3(a)(5)
Certificate of Elimination of Series A Junior
Participating Preferred Stock, as filed with the
Secretary of State of the State of Delaware on April
2,
2015.
3(b)
Amended and Restated By-Laws of Core Molding
Technologies, Inc.
3(b)(1)
Amendment No. 1 to the Amended and Restated By-
Laws of Core Molding Technologies, Inc.
4(a)(1)
Certificate of Incorporation of Core Molding
Technologies, Inc. as filed with the Secretary of State
of Delaware on October
8, 1996
40
Exhibit No.
Description
Location
4(a)(2)
Certificate of Amendment of Certificate of
Incorporation of Core Molding Technologies, Inc. as
filed with the Secretary of State of Delaware on
November
6, 1996
4(a)(3)
Certificate of Amendment of Certificate of
Incorporation as filed with the Secretary of State of
Delaware on August
28, 2002
4(a)(4)
Certificate of Designation, Preferences and Rights of
Series A Junior Participating Preferred Stock as filed
with the Secretary of State of Delaware on July
18,
2007
4(a)(5)
Certificate of Elimination of Series A Junior
Participating Preferred Stock, as filed with the
Secretary of State of the State of Delaware on April
2,
2015
4 (a) (6)
Certificate of Designation, Preferences and Rights of
Series B Junior Participating Preferred Stock, as filed
with the Secretary of State of the State of Delaware on
April 21, 2020
4(a)(7)
Rights Agreement, dated as of April 21, 2020, by and
between Core Molding Technologies, Inc. and
American Stock Transfer & Trust Company, as Rights
Agent
11
Computation of Net Income per Share
31(a)
Section
302 Certification by David L. Duvall,
President, Chief Executive Officer, and Director
31(b)
Section
302 Certification by John P. Zimmer, Vice
President, Secretary, Treasurer, and Chief Financial
Officer
32(a)
Certification of David L. Duvall, Chief Executive
Officer of Core Molding Technologies, Inc., dated
November
6, 2020, pursuant to 18 U.S.C. Section
1350
32(b)
Certification of John P. Zimmer, Chief Financial
Officer of Core Molding Technologies, Inc., dated
November
6, 2020, pursuant to 18 U.S.C. Section
1350
101.INS
XBRL Instance Document
Filed Herein
101.SCH
XBRL Taxonomy Extension Schema Document
Filed Herein
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
Filed Herein
101.LAB
XBRL Taxonomy Extension Label Linkbase
Filed Herein
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
Filed Herein
101.DEF
XBRL Taxonomy Extension Definition Linkbase
Filed Herein
The Asset Purchase Agreement, as filed with the Securities and Exchange Commission as Exhibit
2-A to Registration Statement
on Form S-4 (Registration No.
333-15809), omits the exhibits (including the Buyer Note, Special Warranty Deed, Supply
Agreement, Registration Rights Agreement and Transition Services Agreement identified in the Asset Purchase Agreement) and
schedules (including those identified in Sections
1, 3, 4, 5, 6, 8 and 30 of the Asset Purchase Agreement). Core Molding
Technologies, Inc. will provide any omitted exhibit or schedule to the Securities and Exchange Commission upon request.