UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended March 31, 2024
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
for the transition period from ____________ to
Commission File Number 001-12505
_______________________________________________________________
(Exact name of registrant as specified in its charter)
(State or other jurisdiction incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||||||
(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 ☒ No ¨
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 ☒ No ¨
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 ¨ | Non-accelerated Filer ¨ | 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 ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | Trading Symbol | ||||||||||||||||||
As of May 6, 2024, the latest practicable date, 9,144,640 shares of the registrant’s common stock were issued, which includes 446,999 shares of unvested restricted common stock.
Table of Contents
2
Part I — Financial Information
Item 1. Financial Statements
Core Molding Technologies, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except for per share data)
(Unaudited)
| Three months ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Net sales | $ | $ | |||||||||
| Cost of sales | |||||||||||
| Gross margin | |||||||||||
| Selling, general and administrative expense | |||||||||||
| Operating income | |||||||||||
| Other income and expense | |||||||||||
| Net interest expense | |||||||||||
| Net periodic post-retirement benefit | ( | ( | |||||||||
| Total other (income) and expense | ( | ||||||||||
| Income before taxes | |||||||||||
| Income tax expense | |||||||||||
| Net income | $ | $ | |||||||||
| Net income per common share: | |||||||||||
| Basic | $ | $ | |||||||||
| Diluted | $ | $ | |||||||||
See notes to unaudited consolidated financial statements.
3
Core Molding Technologies, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)
| Three months ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Net income | $ | $ | |||||||||
| Other comprehensive income: | |||||||||||
| Foreign currency hedging derivatives: | |||||||||||
| Unrealized hedge gain (loss) | ( | ||||||||||
| Net of tax benefit (expense) | ( | ||||||||||
| Interest rate swaps: | |||||||||||
| Unrealized hedge gain (loss) | ( | ||||||||||
| Net of tax benefit (expense) | ( | ||||||||||
| Post-retirement benefit plan adjustments: | |||||||||||
| Amortization of net actuarial (gain) loss | ( | ||||||||||
| Amortization of prior service credits | ( | ( | |||||||||
| Net of tax benefit | |||||||||||
| Comprehensive income | $ | $ | |||||||||
See notes to unaudited consolidated financial statements.
4
Core Molding Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except for share data)
| March 31, 2024 | December 31, 2023 | ||||||||||
| (Unaudited) | |||||||||||
| Assets: | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable, net | |||||||||||
| Inventories, net | |||||||||||
| Foreign tax receivable | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Right of use asset | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Goodwill | |||||||||||
| Intangibles, net | |||||||||||
| Other non-current assets | |||||||||||
| Total Assets | $ | $ | |||||||||
| Liabilities and Stockholders’ Equity: | |||||||||||
| Current liabilities: | |||||||||||
| Current portion of long-term debt | $ | $ | |||||||||
| Accounts payable | |||||||||||
| Contract liability | |||||||||||
| Compensation and related benefits | |||||||||||
| Accrued other liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Other non-current liabilities | |||||||||||
| Long-term debt | |||||||||||
| Post-retirement benefits liability | |||||||||||
| Total Liabilities | |||||||||||
| Commitments and Contingencies | |||||||||||
| Stockholders’ Equity: | |||||||||||
Preferred stock — $ | |||||||||||
Common stock — $ | |||||||||||
| Paid-in capital | |||||||||||
| Accumulated other comprehensive income, net of income taxes | |||||||||||
Treasury stock - at cost, | ( | ( | |||||||||
| Retained earnings | |||||||||||
| Total Stockholders’ Equity | |||||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | |||||||||
See notes to unaudited consolidated financial statements.
5
Core Molding Technologies, Inc. and Subsidiaries
Consolidated Statement of Stockholders’ Equity
(In thousands, except for share data)
(Unaudited)
For the three months ended March 31, 2023:
| Common Stock Outstanding | Paid-In Capital | Accumulated Other Comprehensive Income | Treasury Stock | Retained Earnings | Total Stockholders' Equity | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||||||||||||||
Change in post-retirement benefits, net of tax $ | ( | ( | |||||||||||||||||||||||||||||||||||||||
Change in foreign currency hedge, net of tax of $ | |||||||||||||||||||||||||||||||||||||||||
Change in interest rate swaps, net of tax of $ | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Restricted stock vested | — | ||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||
| Share-based compensation | |||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||
For the three months ended March 31, 2024:
| Common Stock Outstanding | Paid-In Capital | Accumulated Other Comprehensive Income | Treasury Stock | Retained Earnings | Total Stockholders' Equity | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||||||||||||||
Change in post-retirement benefits, net of tax of $ | ( | ( | |||||||||||||||||||||||||||||||||||||||
Change in foreign currency hedge, net of tax of $ | ( | ( | |||||||||||||||||||||||||||||||||||||||
Change in interest rate swaps, net of tax of $ | |||||||||||||||||||||||||||||||||||||||||
| Restricted stock vested | |||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | ( | — | ( | ( | |||||||||||||||||||||||||||||||||||||
| Share-based compensation | |||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2024 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||
See notes to unaudited consolidated financial statements.
6
Core Molding Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
| Three months ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Loss on disposal of property, plant and equipment | |||||||||||
| Share-based compensation | |||||||||||
| Losses (Gain) on foreign currency remeasurement | ( | ||||||||||
| Change in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( | ||||||||||
| Inventories | ( | ( | |||||||||
| Prepaid and other assets | ( | ||||||||||
| Accounts payable | |||||||||||
| Accrued and other liabilities | ( | ||||||||||
| Post-retirement benefits liability | ( | ( | |||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Purchase of property, plant and equipment | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Gross repayments on revolving line of credit | ( | ||||||||||
| Gross borrowings on revolving line of credit | |||||||||||
| Payments for taxes related to net share settlement of equity awards | ( | ( | |||||||||
| Payment of principal on term loans | ( | ( | |||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Net change in cash and cash equivalents | |||||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
| Cash paid for: | |||||||||||
| Interest | $ | $ | |||||||||
| Income taxes | $ | $ | |||||||||
| Non-cash investing activities: | |||||||||||
| Fixed asset purchases in accounts payable | $ | $ | |||||||||
See notes to unaudited consolidated financial statements.
7
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 March 31, 2024, and the results of operations and cash flows for the three months ended March 31, 2024. The “Notes to Consolidated Financial Statements” contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2023, should be read in conjunction with these consolidated financial statements.
2. CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Principles of Consolidation: 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.
Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 under different assumptions and conditions.
Revenue Recognition: The Company historically has recognized revenue from two streams, product revenue and tooling revenue. Product revenue is earned from the manufacture and sale of sheet molding compounds and thermoset and thermoplastic products. Revenue from product sales is generally recognized when products are shipped, as the Company transfers control to the customer and is entitled to payment upon shipment. In certain circumstances, the Company recognizes revenue from product sales when products are produced and the customer takes control at our production facility.
Tooling revenue is earned from manufacturing multiple 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 a given period. 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 titled 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.
Cash and Cash Equivalents: The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash is held primarily in three banks in three separate jurisdictions. The Company had $26,618,000 cash on hand at March 31, 2024 and had $24,104,000 cash on hand at December 31, 2023.
8
Accounts Receivable Allowances: Management maintains allowances for credit losses resulting from the inability of its customers to make required payments. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company has determined that a $90,000 allowance for credit losses is needed at March 31, 2024 and none is needed at December 31, 2023. Management also records estimates for customer returns and deductions, discounts offered to customers, and for price adjustments. Should customer returns and deductions, discounts, and price adjustments fluctuate from the estimated amounts, additional allowances may be required. The Company had an allowance for estimated chargebacks of $123,000 at March 31, 2024 and $138,000 at December 31, 2023. There have been no material changes in the methodology of these calculations.
Inventories: Inventories, which include material, labor and manufacturing overhead, are valued at the lower of cost or net 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 $730,000 at March 31, 2024 and $671,000 at December 31, 2023.
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 $80,000 at March 31, 2024, and $77,000 at December 31, 2023. Contract assets are generally classified as current within prepaid expenses and other current assets on the Consolidated Balance Sheets. For the three months ended March 31, 2024 and March 31, 2023 the Company recognized no impairments on contract assets. For the three months ended March 31, 2024, the Company recognized $1,841,000 of revenue from contract liabilities related to open jobs outstanding as of December 31, 2023.
Income Taxes: 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.
Long-Lived Assets: Long-lived assets consist primarily of property, plant and equipment and definite-lived intangibles. The recoverability of long-lived assets is evaluated by an analysis of operating results and consideration of other significant events or changes in the business environment. The Company evaluates whether impairment exists for property, plant and equipment on the basis of undiscounted expected future cash flows from operations before interest. There were no impairment charges of the Company’s long-lived assets for the three months ended March 31, 2024 and March 31, 2023, respectively.
Goodwill: The purchase consideration of acquired businesses has been allocated to the assets and liabilities acquired based on the estimated fair values on the respective acquisition dates. Based on these values, the excess purchase consideration over the fair value of the net assets acquired was allocated to goodwill. The Company accounts for goodwill in accordance with FASB ASC Topic 350, Intangibles - Goodwill and Other. FASB ASC Topic 350 prohibits the amortization of goodwill and requires these assets be reviewed for impairment.
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 period. The Company may resume the qualitative assessment in any subsequent period.
Under a qualitative and quantitative approach, the impairment test for goodwill consists of an assessment of whether it is more-likely-than-not that the fair value is less than its carrying amount. As part of the qualitative assessment, the Company considers relevant events and circumstances that affect the fair value or carrying amount of the Company. Such events and circumstances could include changes in economic conditions, industry and market conditions, cost factors, overall financial performance, and capital markets pricing. The Company places more weight on the events and circumstances that most affect the Company's fair value or carrying amount. These factors are all considered by management in reaching its conclusion about whether to perform step one of the impairment test. If the Company elects to bypass the qualitative assessment, or if a qualitative assessment indicates it is more-likely-than-not that the estimated carrying value exceeds its fair value, the Company proceeds to a quantitative approach. There were no impairment charges of the Company's goodwill for the three months ended March 31, 2024 and March 31, 2023, respectively.
Self-Insurance: The Company is self-insured with respect to its facilities in Columbus, Ohio; Gaffney, South Carolina; Winona, Minnesota; and Brownsville, Texas for medical, dental and vision claims and Columbus, Ohio for workers’ compensation claims, all of which are subject to stop-loss insurance thresholds. The Company is also self-insured for dental and
9
vision with respect to its Cobourg, Canada location. The Company has recorded an estimated liability for self-insured medical, dental and vision claims incurred but not reported and worker’s compensation claims incurred but not reported at March 31, 2024 and December 31, 2023 of $997,000 and $988,000 , respectively. Estimated liabilities for self-insurance are classified as current within accrued other liabilities on the Consolidated Balance Sheets.
Post-Retirement Benefits: Management records an accrual for post-retirement costs associated with the health care plan sponsored by Core Molding Technologies. Should actual results differ from the assumptions used to determine the reserves, additional provisions may be required. In particular, increases in future healthcare costs above the assumptions could have an adverse effect on Core Molding Technologies’ operations. The effect of a change in healthcare costs is described in Note 12, "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, 2023. Core Molding Technologies had a liability for post-retirement healthcare benefits based on actuarial computed estimates of $3,008,000 at March 31, 2024 and $3,116,000 at December 31, 2023.
3. NET INCOME PER COMMON SHARE
Net income per common share is computed based on the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed similarly but includes the effect of the assumed exercise of dilutive stock appreciation rights and restricted stock under the treasury stock method.
On May 13, 2021, the Company's stockholders approved the 2021 Long Term Equity Incentive Plan (the “2021 Plan”) that replaced the 2006 Long Term Equity Incentive Plan (the “2006 Plan”) approved in May 2006 and amended in May 2015. The 2021 Plan provides restricted stock award recipients voting rights equivalent to the Company's common stock and accrual of dividends but not receipt of dividends until all conditions or restrictions related to such award have been satisfied. Accordingly, the restricted shares are not considered participating shares. The 2006 Plan provides restricted stock award recipients voting rights equivalent to the Company’s common stock and accrual and receipt of dividends irrespective of any conditions or restrictions related to such award being satisfied. Accordingly, the restricted shares granted from the 2006 Plan are considered a participating security and the Company is required to apply the two-class method to consider the impact of the restricted shares on the calculation of basic and diluted earnings per share.
The computation of basic and diluted net income per common share (in thousands, except for per share data) is as follows:
| Three months ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Net income | $ | $ | |||||||||
| Less: net income allocated to participating securities | |||||||||||
| Net income available to common stockholders | $ | $ | |||||||||
| Weighted average common shares outstanding — basic | |||||||||||
| Effect of weighted average dilutive securities | |||||||||||
| Weighted average common and potentially issuable common shares outstanding — diluted | |||||||||||
| Basic net income per common share | $ | $ | |||||||||
| Diluted net income per common share | $ | $ | |||||||||
The computation of basic and diluted net income per participating share is as follows (in thousands, except for per share data):
| Three months ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Net income allocated to participating securities | $ | $ | |||||||||
| Weighted average participating shares outstanding — basic | |||||||||||
| Effect of dilutive securities | |||||||||||
| Weighted average common and potentially issuable common shares outstanding — diluted | |||||||||||
| Basic net income per participating share | $ | $ | |||||||||
| Diluted net income per participating share | $ | $ | |||||||||
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4. MAJOR CUSTOMERS
The Company had six major customers during the three months ended March 31, 2024, BRP, Inc. ("BRP"), Navistar, Inc. ("Navistar"), PACCAR, Inc. ("PACCAR"), Universal Forest Products, Inc. ("UFP"), Volvo Group North America, LLC ("Volvo") and Yamaha Motor Corporation ("Yamaha"). Major customers are defined as customers whose sales individually consist of more than ten percent of the Company's total sales during any annual or interim reporting period presented. The loss of a significant portion of sales to these customers could have a material adverse effect on the Company.
The following table presents sales revenue for the above-mentioned customers for the three months ended March 31, 2024 and 2023 (in thousands):
| Three months ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| BRP product sales | $ | $ | |||||||||
| BRP tooling sales | |||||||||||
| Total BRP sales | |||||||||||
| Navistar product sales | |||||||||||
| Navistar tooling sales | |||||||||||
Total Navistar sales | |||||||||||
| PACCAR product sales | |||||||||||
| PACCAR tooling sales | |||||||||||
| Total PACCAR sales | |||||||||||
| UFP product sales | |||||||||||
| UFP tooling sales | |||||||||||
Total UFP sales | |||||||||||
| Volvo product sales | |||||||||||
| Volvo tooling sales | |||||||||||
Total Volvo sales | |||||||||||
| Yamaha product sales | |||||||||||
| Yamaha tooling sales | |||||||||||
| Total Yamaha sales | |||||||||||
| Other product sales | |||||||||||
| Other tooling sales | |||||||||||
Total other sales | |||||||||||
| Total product sales | |||||||||||
| Total tooling sales | |||||||||||
Total sales | $ | $ | |||||||||
11
5. INVENTORY
Inventories, net consisted of the following (in thousands):
| March 31, 2024 | December 31, 2023 | ||||||||||
Raw materials | $ | $ | |||||||||
Work in process | |||||||||||
Finished goods | |||||||||||
Total | $ | $ | |||||||||
Inventory quantities on-hand are regularly reviewed, and where necessary, provisions for excess and obsolete inventory are recorded based on historical and anticipated usage.
6. 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 to 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 the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's 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 (in thousands):
| Three months ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Operating lease cost | $ | $ | |||||||||
| Short-term lease cost | $ | $ | |||||||||
| Total net lease cost | $ | $ | |||||||||
Other supplemental balance sheet information related to leases was as follows (in thousands):
| March 31, 2024 | December 31, 2023 | ||||||||||
| Operating lease right of use assets | $ | $ | |||||||||
Current operating lease liabilities(A) | $ | $ | |||||||||
Noncurrent operating lease liabilities(B) | |||||||||||
| Total operating lease liabilities | $ | $ | |||||||||
(A)Current operating lease liabilities are included in in the Consolidated Balance Sheets.
(B)Noncurrent operating lease liabilities are included in in the Consolidated Balance Sheets.
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7. PROPERTY, PLANT & EQUIPMENT
Property, plant and equipment, net consisted of the following for the periods specified (in thousands):
| March 31, 2024 | December 31, 2023 | ||||||||||
| Property, plant and equipment | $ | $ | |||||||||
| Accumulated depreciation | ( | ( | |||||||||
| Property, plant and equipment — net | $ | $ | |||||||||
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 March 31, 2024 and 2023 was $2,873,000 and $2,978,000 , respectively. Amounts invested in capital additions in progress were $3,421,000 and $2,264,000 at March 31, 2024 and December 31, 2023, respectively. At March 31, 2024 and December 31, 2023, purchase commitments for capital expenditures in progress were $2,939,000 and $1,100,000 , respectively.
8. GOODWILL AND INTANGIBLES
Goodwill activity for the three months ended March 31, 2024 consisted of the following (in thousands):
| Balance at December 31, 2023 | $ | ||||
| Additions | |||||
| Impairment | |||||
| Balance at March 31, 2024 | $ | ||||
Intangibles, net at March 31, 2024 were comprised of the following (in thousands):
| Definite-lived Intangible Assets | Amortization Period | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||
| Trade name | $ | $ | ( | $ | |||||||||||||||||||
| Trademarks | ( | ||||||||||||||||||||||
| Non-competition agreement | ( | ||||||||||||||||||||||
| Developed technology | ( | ||||||||||||||||||||||
| Customer relationships | ( | ||||||||||||||||||||||
| Total | $ | $ | ( | $ | |||||||||||||||||||
Intangibles, net at December 31, 2023 were comprised of the following (in thousands):
| Definite-lived Intangible Assets | Amortization Period | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||
| Trade name | $ | $ | ( | $ | |||||||||||||||||||
| Trademarks | ( | ||||||||||||||||||||||
| Non-competition agreement | ( | ||||||||||||||||||||||
| Developed technology | ( | ||||||||||||||||||||||
| Customer relationships | ( | ||||||||||||||||||||||
| Total | $ | $ | ( | $ | |||||||||||||||||||
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9. POST-RETIREMENT BENEFITS
The components of expense for the Company’s post-retirement benefit plans are as follows (in thousands):
| Three months ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Pension expense: | |||||||||||
Multi-employer plan | $ | $ | |||||||||
Defined contribution plan | |||||||||||
| Total pension expense | |||||||||||
| Health and life insurance: | |||||||||||
Interest cost | |||||||||||
| Amortization of prior service credits | ( | ( | |||||||||
Amortization of net loss | ( | ||||||||||
| Net periodic benefit credit | ( | ( | |||||||||
| Total post-retirement benefits expense | $ | $ | |||||||||
The Company made payments of $550,000 to pension plans and $131,000 for post-retirement healthcare and life insurance during the three months ended March 31, 2024. For the remainder of 2024, the Company expects to make approximately $1,803,000 of pension plan payments, of which $920,000 was accrued at March 31, 2024. The Company also expects to make approximately $167,000
10. DEBT
Debt consists of the following (in thousands):
| March 31, 2024 | December 31, 2023 | ||||||||||
| Huntington term loans payable | |||||||||||
| Leaf Capital term loan payable | |||||||||||
| Total | |||||||||||
| Less deferred loan costs | ( | ( | |||||||||
| Less current portion | ( | ( | |||||||||
| Long-term debt | $ | $ | |||||||||
Huntington Credit Agreement
On July 22, 2022, the Company entered into a credit agreement (the “Huntington Credit Agreement”) with The Huntington National Bank (“Huntington”), as the sole lender, administrative agent, lead arranger and book runner, and the lenders from time to time thereto. Pursuant to the terms of the Huntington Credit Agreement, Huntington made available to the Company secured loans (the “Huntington Loans”) in the maximum aggregate principal amount of $75,000,000 , comprised of three $25,000,000 commitments: a term loan commitment, a CapEx loan commitment and a revolving loan commitment.
At the option of the Company, the Huntington Loans shall be comprised of Alternative Base Rate (ABR) Loans or Secure Overnight Financing Rate (SOFR) Loans.
ABR Loans bear interest at a per annum rate equal to ABR plus a margin of 280 to 330 basis points determined based on the Company’s leverage ratio. ABR is the greatest of (a) the Prime Rate in effect on such day, (b) the Federal Funds Rate in effect on such day plus 0.50 % per annum and (c) Daily Simple SOFR for such day (taking into account any floor set forth in the definition of “Daily Simple SOFR”) plus 1.00 % per annum; provided, that if the ABR shall be less than 0.00 %, then ABR shall be deemed to be 0.00 %.
SOFR Loans bear interest at a per annum rate equal to Daily Simple SOFR plus a margin of 180 to 230 basis points determined based on the Company’s leverage ratio. Daily Simple SOFR means, for any day (a “SOFR Rate Day”), a rate per annum equal to the greater of (a) SOFR for the day (such day, the “SOFR Determination Date”) that is five (5) U.S. Government Securities
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Business Days prior to (i) if such SOFR Rate Day is a U.S. Government Securities Business Day, such SOFR Rate Day or (ii) if such SOFR Rate Day is not a U.S. Government Securities Business Day, the U.S. Government Securities Business Day immediately preceding such SOFR Rate Day, in each case, as such SOFR is published by the SOFR Administrator on the SOFR Administrator’s Website, and (b) 0.00 %.
The Company’s obligations under the Huntington Credit Agreement are secured by all of the U.S. and Canadian assets of the Company, including all of its equity interests in each of the Company’s U.S. and Canadian subsidiaries and 65 % of the Company’s equity interest in its Mexican subsidiaries, and are unconditionally guaranteed by certain subsidiaries of the Company.
The Huntington Credit Agreement contains certain customary representations and warranties, conditions, affirmative and negative covenants and events of default. The Company is in compliance with such covenants as of March 31, 2024.
Voluntary prepayments of amounts outstanding under the Huntington Loans are permitted at any time without premium or penalty.
The Company incurred debt origination fees of $402,000 related to the Huntington Credit Agreement, which is being amortized over the life of the agreement.
Huntington Capex Loan
Pursuant to the terms of the Huntington Credit Agreement, Huntington made available to the Company secured Capex loan (the “Huntington Capex Loan”) in the maximum aggregate principal amount of $25,000,000 . Proceeds of the Huntington Capex Loan will be used to finance the ongoing capital expenditure needs of the Company.
Any borrowings from the Huntington Capex Loan will be converted to new term loans annually each February, beginning February 2025, and will have monthly principal repayments based on a sixty-month amortization period with all amounts outstanding on the Huntington Capex Loan being fully due on July 22, 2027.
Huntington Revolving Loan
Pursuant to the terms of the Huntington Credit Agreement, Huntington made available to the Company a revolving loan commitment (the “Huntington Revolving Loan”) of $25,000,000 . The Company has $25,000,000 of available revolving loans of which none was outstanding as of March 31, 2024 and December 31, 2023, respectively.
The Huntington Credit Agreement makes available to the Company a revolving commitment in the maximum amount of $25,000,000 at the Company’s option at any time during the five-year period following the closing. The revolving loan commitment terminates, and all outstanding borrowings thereunder must be repaid on July 22, 2027.
The interest rate for the Huntington Revolving Loan was 7.11 % and 7.11% as of March 31, 2024 and December 31, 2023, respectively.
Huntington Term Loan
Pursuant to the terms of the Huntington Credit Agreement, Huntington made available to the Company a Term Loan commitment (the “Huntington Term Loan”) of $25,000,000 ($25,000,000 of which was advanced to the Company on July 22, 2022). The Huntington Term Loan is to be repaid in monthly installments beginning August 2022 of $104,000 per month for the first 24 months, $156,000 per month for the next 24 months, $208,000 for the next 12 months and the remaining balance to be paid on July 22, 2027. The interest rate for the Huntington Term Loan was 7.11 % and 7.11% as of March 31, 2024 and December 31, 2023, respectively.
Interest Rate Swap Agreement
The Company entered into an interest rate swap agreement that became effective July 22, 2022 and continues through July 2027, which was designed as a cash flow hedge for $25,000,000 of the Huntington Term Loan. Under this agreement, the Company will pay a fixed rate of 2.95 % to the swap counterparty in exchange for the Term Loans daily variable SOFR. As a result the interest rate paid on the Huntington Term Loan was 4.75% as of March 31, 2024 and December 31, 2023. The fair value of the interest rate swap was an asset of $797,000 and $524,000 at March 31, 2024 and December 31, 2023, respectively.
Leaf Capital Funding
On April 24, 2020 the Company entered into a finance agreement with Leaf Capital Funding of $175,000 for equipment. The parties agreed to a fixed interest rate of 5.50 % and a term of 60 months.
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11. INCOME TAXES
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. Management makes assumptions, judgments, and estimates to determine the deferred tax assets and liabilities. The Company evaluates provisions and deferred tax assets quarterly to determine if adjustments to our valuation allowance are required based on the consideration of all available evidence.
At March 31, 2024, the Company had a net deferred tax asset of $1,595,000 related to tax positions in Mexico and deferred tax liabilities of $1,182,000 and $43,000 related to tax positions in the United States and Canada. Deferred tax assets are included in "Other non-current assets" on the Consolidated Balance Sheets and deferred tax liabilities are included in "Other non-current liabilities" on the Consolidated Balance Sheets. As of March 31, 2024, the Company had a valuation allowance of $1,530,000, against the deferred tax asset related to local tax positions in the Unites States, due to cumulative losses over the last three years and uncertainty related to the Company's ability to realize the deferred assets. The Company believes that the deferred tax assets associated with the Canadian, Mexican, and federal United States tax jurisdictions are more-likely-than-not to be realizable based on estimates of future taxable income.
Income tax expense for the three months ended March 31, 2024 is estimated to be $1,029,000 , approximately 21.5 % of income before income taxes. Income tax expense for the three months ended March 31, 2023 was estimated to be $1,919,000 , approximately 24.7 % of income before income taxes.
The Company files income tax returns in the United States, Mexico, Canada and various state and local jurisdictions. The Company is subject to federal income tax examinations for tax years 2014 through 2017 but the scope of examination is limited to adjustments resulting from Net Operating Loss carry back claims from the 2019, and 2020 tax years. The Company is subject to federal income tax examinations for years 2020 through 2023 with unlimited scope. The Company is not subject to state examinations for years before 2020. The Company is not subject to Mexican income tax examinations by Mexican authorities for the years before 2018 and is not subject to Canadian income tax examinations by Canadian authorities for the years before 2019.
12. STOCK BASED COMPENSATION
On May 13, 2021, The Company's stockholders approved the 2021 Long Term Equity Incentive Plan (the “2021 Plan”) that replaced the 2006 Long Term Equity Incentive Plan (the “2006 Plan”) approved in May 2006 and amended in May 2015. The 2021 Plan allows for grants to employees, officers, non-employee directors, consultants, independent contractors and advisors of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, and other stock-based awards (“stock awards”) up to an aggregate of 152,501 awards. Awards can be granted under the 2021 Plan through the earlier of May 13, 2031, or the date the maximum number of available awards under the 2021 Plan have been granted. No new awards may be granted from the 2006 Plan.
Awards under the 2021 Plan vest over one to three years and shares previously awarded and currently unvested under the 2006 Plan vest over three years. Shares granted under both the 2006 and 2021 Plans vest immediately upon the date of a participant’s death, disability or change in control.
The Company follows the provisions of FASB ASC 718 requiring that compensation cost relating to share-based payment transactions be recognized in the financial statements. The cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee's requisite service period (generally the vesting period of the equity award).
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 measured at the fair value of the Company's common stock on the date of issuance and recognized 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.
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The following summarizes the status of Restricted Stock and changes during the three months ended March 31, 2024:
| Number of Shares | Weighted Average Grant Date Fair Value | ||||||||||
| Unvested balance at December 31, 2023 | $ | ||||||||||
| Granted | |||||||||||
| Vested | ( | ||||||||||
| Forfeited | |||||||||||
| Unvested balance at March 31, 2024 | $ | ||||||||||
At March 31, 2024 and 2023, there was $4,113,000 and $5,702,000 , respectively, of total unrecognized compensation expense, related to Restricted Stock grants. The unrecognized compensation expense at March 31, 2024 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 March 31, 2024 and 2023 was $711,000 and $725,000 , respectively, all of which was recorded to selling, general and administrative expense.
During the three months ended March 31, 2024 , employees withheld 17,773 shares of the Company's common stock to satisfy income tax withholding obligations in connection with the vesting of restricted awards, and in March 31, 2023 no shares of the Company's common stock was withheld. During the three months ended March 31, 2023, employees withheld 1,318 shares of common stock to satisfy income tax withholding obligations in connection with the exercise of stock appreciation rights.
Performance Restricted Stock Awards
The Company grants shares of its common stock to certain officers and key managers in the form of shares of performance-based restricted stock ("Performance Restricted Stock Awards"). These awards are measured at the fair value of the Company's common stock on the date of issuance and recognized ratably as compensation expense over the applicable vesting period to the extent that the performance measures have been satisfied as of the last day of the performance period of the award. The total amount payable as of the award's vesting date is determined by the three year average Operational Income and Return on Capital Employed performance measure achievement. The Company adjusts compensation expense for actual forfeitures as they occur, and for estimated performance measure achievement.
The following summarizes the status of Performance Restricted Stock Awards and changes during the three months ended March 31, 2024:
| Number of Shares | Weighted Average Grant Date Fair Value | ||||||||||
| Unvested balance at December 31, 2023 | $ | ||||||||||
| Granted | |||||||||||
| Vested | |||||||||||
| Forfeited | |||||||||||
| Unvested balance at March 31, 2024 | $ | ||||||||||
At March 31, 2024 and 2023, there was $651,000 and $207,000 of total unrecognized compensation expense related to Performance Restricted Stock Awards. The unrecognized compensation expense at March 31, 2024 is expected to be recognized over the weighted-average period of 2.6 years. Total compensation cost related to Performance Restricted Stock Awards for the three months ended March 31, 2024 and March 31, 2023 was $28,000 and 6,000 , all of which was recorded to selling, general and administrative expense.
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13. 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 hierarchical valuation methodology provides a fair value framework that describes the categorization of assets and liabilities in 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 March 31, 2024 and December 31, 2023 approximate fair value due to the short-term maturities of these financial instruments. As of March 31, 2024 and December 31, 2023, the carrying amounts of the Huntington Term Loan and Huntington Revolving Loan approximated fair value due to the short-term nature of the underlying variable rate SOFR used to determine interest charged on the loans. The Company had Level 2 fair value measurements at March 31, 2024 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 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.
Interest Rate Swap
The Company entered into an interest rate swap contract to fix the interest rate on an initial aggregate amount of $25,000,000 thereby reducing exposure to interest rate changes. The interest rate swap pays a fixed rate of 2.95 % to the swap counterparty in exchange for daily SOFR. At inception, all interest rate swaps were formally documented as cash flow hedges and are measured at fair value each reporting period. See Note 10, "Debt", for additional information. The notional contract value of the interest rate swap was $22,917,000 and $24,167,000 as of March 31, 2024 and 2023, respectively.
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Financial statement impacts
The following table detail amounts related to our derivatives designated as hedging instruments (in thousands):
| Fair Value of Derivative Instruments March 31, 2024 | ||||||||||||||||||||||||||
| 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 | $ | ||||||||||||||||||||||
| Other non-current assets | $ | Other non-current liabilities | $ | |||||||||||||||||||||||
| Interest rate swaps | Prepaid expenses other current assets | $ | Accrued other liabilities | $ | ||||||||||||||||||||||
| Other non-current assets | $ | Other non-current liabilities | $ | |||||||||||||||||||||||
| Fair Value of Derivative Instruments December 31, 2023 | ||||||||||||||||||||||||||
| 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 | $ | ||||||||||||||||||||||
| Other non-current assets | $ | Other non-current liabilities | $ | |||||||||||||||||||||||
| Interest rate swaps | Prepaid expenses other current assets | $ | Accrued other liabilities | $ | ||||||||||||||||||||||
| Other non-current assets | $ | Other non-current liabilities | $ | |||||||||||||||||||||||
The following tables summarize the amount of unrealized and realized gain (loss) recognized in Accumulated Other Comprehensive Income ("AOCI") for the three months ended March 31, 2024 and 2023 (in thousands):
| Derivatives in subtopic 815-20 Cash Flow Hedging Relationship: | Amount of Unrealized Gain (Loss) Recognized in Accumulated Other Comprehensive Income on Derivative | Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income(A) | Amount of Realized Gain (Loss) Reclassified from Accumulated Other Comprehensive Income | |||||||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||||||||||||
| Foreign exchange contracts | $ | ( | $ | Cost of goods sold | $ | $ | ||||||||||||||||||||||||||
| Selling, general and administrative expense | $ | $ | ||||||||||||||||||||||||||||||
| Interest rate swaps | $ | $ | ( | Interest expense | $ | $ | ||||||||||||||||||||||||||
(A) The foreign currency derivative activity reclassified from Accumulated Other Comprehensive Income is allocated to cost of goods sold and selling, general and administrative expense based on the percentage of foreign currency spend.
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14. ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table presents changes in Accumulated Other Comprehensive Income, net of tax, for the three months ended March 31, 2024 and 2023 (in thousands):
| 2023: | Derivative Hedging Activities | Post Retirement Benefit Plan Items(A) | Accumulated Other Comprehensive Income (Loss) | ||||||||
| 2023: | |||||||||||
| Balance at December 31, 2022 | $ | $ | $ | ||||||||
| Other comprehensive income before reclassifications | 408 | 408 | |||||||||
| Amounts reclassified from accumulated other comprehensive income | ( | ( | ( | ||||||||
| Income tax benefit | ( | ( | |||||||||
| Balance at March 31, 2023 | $ | $ | $ | ||||||||
| 2024: | |||||||||||
| Balance at December 31, 2023 | $ | $ | $ | ||||||||
| Other comprehensive income before reclassifications | ( | ||||||||||
| Amounts reclassified from accumulated other comprehensive income | ( | ( | ( | ||||||||
| Income tax benefit (expense) | |||||||||||
| Balance at March 31, 2024 | $ | $ | $ | ||||||||
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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, which are subject to the "safe harbor" created by Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exhcange Act"). As a general matter, forward-looking statements are those focused upon future plans, objectives or performance as opposed to historical items and include statements of anticipated events or trends and expectations and beliefs relating to matters not historical in nature. Such forward-looking statements involve known and unknown risks and are subject to uncertainties and factors relating to Core Molding Technologies' operations and business environment, all of which are difficult to predict and many of which are beyond Core Molding Technologies' control. Words such as “may,” “will,” “could,” “would,” “should,” “anticipate,” “predict,” “potential,” “continue,” “expect,” “intend,” “plans,” “projects,” “believes,” “estimates,” “encouraged,” “confident” and similar expressions are used to identify these forward-looking statements. These uncertainties and factors could cause Core Molding Technologies' actual results to differ materially from those matters expressed in or implied by such forward-looking statements.
Core Molding Technologies believes that the following factors, among others, could affect its future performance and cause actual results to differ materially from those expressed or implied by forward-looking statements made in this Annual Report on Form 10-Q:
•dependence upon certain major customers as the primary source of Core Molding Technologies’ sales revenues and the potential loss of any major customers due to the completion of existing production programs with those customers or otherwise;
•business conditions in the plastics, transportation, power sports, utilities and commercial product industries (including changes in demand for production);
•the availability and price increases of raw materials;
•general economic, social, regulatory (including foreign trade policy) and political environments in the countries in which Core Molding Technologies operates;
•safety and security conditions in Mexico;
•fluctuations in foreign currency exchange rates;
•efforts of Core Molding Technologies to expand its customer base; the ability to develop new and innovative products and to diversify markets, materials and processes and increase operational enhancements;
•ability to accurately quote and execute manufacturing processes for new business; the actions of competitors, customers, and suppliers;
•failure of Core Molding Technologies’ suppliers to perform their obligations;
•inflationary pressures; new technologies; regulatory matters;
•labor relations and labor availability as well as possible work stoppages or labor disruptions at one or more of our union locations or one of our customer or supplier locations;
•the loss or inability of Core Molding Technologies to attract and retain key personnel;
•the ability to successfully identify, evaluate and manage potential acquisitions and to benefit from and properly integrate any completed acquisitions;
•federal, state and local environmental laws and regulations (including engine emission regulations);
•the availability of sufficient capital; the ability of Core Molding Technologies to provide on-time delivery to customers, which may require additional shipping expenses to ensure on-time delivery or otherwise result in late fees and other customer charges; risk of cancellation or rescheduling of orders;
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•management’s decision to pursue new products or businesses which involve additional costs, risks or capital expenditures;
•inadequate insurance coverage to protect against potential hazards; equipment and machinery failure; product liability and warranty claims;
•cybersecurity incidents or other similar disruptions impacting Core Molding Technologies or significant customers and/or suppliers; and
•other risks identified from time to time in Core Molding Technologies’ other public documents on file with the Securities and Exchange Commission, including those described in Item 1A of this Annual Report on Form 10-K.
Description of the Company
Core Molding Technologies and its subsidiaries operate in the engineered materials market as one operating segment as a molder of thermoplastic and thermoset structural products. The Company produces and sells molded products for varied markets, including medium and heavy-duty trucks, power sports, building products, industrial and utilities and other commercial markets. Core Molding Technologies has its headquarters in Columbus, Ohio, and operates six production facilities in the United States, Canada and Mexico.
Business Overview
General
The Company’s business and operating results are directly affected by changes in overall customer demand, operational costs and performance and leverage of our fixed cost and selling, general and administrative ("SG&A") infrastructure.
Product sales fluctuate in response to several factors, including many that are beyond the Company’s control, such as general economic conditions, interest rates, government regulations, consumer spending, raw material cost inflation, labor availability, and our customers’ production rates and inventory levels. The Company's customers operate in many different markets with different cyclicality and seasonality.
Operating performance is dependent on the Company’s ability to manage changes in input costs for items such as raw materials, labor, and overhead operating costs. The Company has certain contractual commitments that restrict its ability to pass through changes in input costs to certain customers. As a result, during periods of significant increases or decreases in input costs operating results may be impacted.
Performance is also affected by manufacturing efficiencies, including items such as on time delivery, quality, scrap, and productivity. Market factors of supply and demand can impact operating costs. In periods of rapid increases or decreases in customer demand, the Company is required to ramp operational activity up or down quickly, which may impact manufacturing efficiencies more than in periods of steady demand.
Operating performance is also dependent on the Company’s ability to effectively launch new customer programs, which are extremely complex in nature. The start of production of a new program is the result of a process of developing new molds and assembly equipment, validation testing, manufacturing process design, development and testing, along with training and often hiring employees. Meeting the targeted levels of manufacturing efficiency for new programs usually occurs over time as the Company gains experience with new tools and processes. Therefore, during a new program launch period, start-up costs and inefficiencies can affect operating results.
Business Outlook
Looking forward, based on industry analyst projections, customer forecasts, anticipated price changes, as well as anticipated new program launches, offset by current programs that we expect to begin to ramp down in the second half of 2024 as further described below, the Company expects revenues for calendar year 2024 to decrease by approximately 10 to 15 percent as compared to 2023. Additional factors contributing to our anticipated 2024 revenue outlook include an expected cyclical demand slowdown, decreased customer inventory builds due to stabilizing inventory levels as well as a consumer demand environment that is more consistent with pre-pandemic levels. The Company anticipates the revenue decrease to be more significant in the first half of 2024 and a lesser decrease in the second half of 2024 compared to the same periods in 2023.
22
Beginning in the second half of 2024 and continuing through 2026, the Company’s business with Volvo will begin transitioning from existing programs that the Company currently supplies to new programs that the Company does not support. Notwithstanding this transition and the completion of existing programs with Volvo, the Company continues to actively bid for new Volvo business, which we believe we will continue to secure outside of the current programs. Going forward we remain focused on continuing to replace phased out business from existing programs with new programs from Volvo or other customers.
The Company’s raw material supply chains remain stable, and the Company anticipates raw material pricing in 2024 to remain flat or slightly higher as compared to 2023. Labor markets have also stabilized, although at higher cost levels over the past several years. The Company does not anticipate challenges in hiring hourly labor, although management believes wage pressure will continue, especially in Mexico.
Results of Operations
Three Months Ended March 31, 2024, as Compared to Three Months Ended March 31, 2023
Net sales for the three months ended March 31, 2024 and 2023 totaled $78,145,000 and $99,507,000, respectively. Included in net sales were tooling project sales of $2,314,000 and $1,170,000 for the three months ended March 31, 2024 and 2023, respectively. Tooling sales are sporadic in nature and fluctuate in regard to scope and related revenue on a period-to-period basis. Product sales, excluding tooling project sales, for the three months ended March 31, 2024 were $75,831,000 compared to $98,337,000 for the same period in 2023. The decrease in sales is primarily the result of lower demand across all industries. The Company's product sales for the three months ended March 31, 2024 compared to the same period in 2023 by market are as follows (in thousands):
| Three months ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Medium and heavy-duty truck | $ | 41,509 | $ | 49,516 | |||||||
| Power sports | 18,859 | 22,036 | |||||||||
| Building products | 6,545 | 11,787 | |||||||||
| Industrial and utilities | 3,346 | 6,430 | |||||||||
| All other | 5,572 | 8,568 | |||||||||
| Net product revenue | $ | 75,831 | $ | 98,337 | |||||||
Gross margin was 17.0% and 17.8% of sales for the three months ended March 31, 2024 and 2023, respectively. Gross margin compared to last year was impacted by increased net changes in selling price and raw material costs of 1.7%, offset by lower fixed cost leverage of 1.7% and operational inefficiencies and product mix of 0.8%.
Selling general and administrative expense ("SG&A") was $8,573,000 for the three months ended March 31, 2024, compared to $9,668,000 for the three months ended March 31, 2023. Decreased SG&A expenses resulted primarily from lower bonus of $512,000, favorable foreign currency translation of $210,000 and lower labor and benefits costs of $117,000 .
Net interest expense totaled $82,000 for the three months ended March 31, 2024, compared to $356,000 for the three months ended March 31, 2023. Lower interest expense was primarily due to higher interest income from cash accumulation of $252,000.
Income tax expense for the three months ended March 31, 2024 is estimated to be $1,029,000, approximately 21.5% of income before income taxes. Income tax expense for the three months ended March 31, 2023 was estimated to be $1,919,000, approximately 24.7% of income before income taxes.
The Company recorded net income for the three months ended March 31, 2024 of $3,759,000 or $0.43 per basic and diluted share compared with net income of $5,852,000, or $0.69 per basic and $0.66 diluted share, for the three months ended March 31, 2023.
23
Comprehensive income totaled $3,465,000 for the three months ended March 31, 2024, compared to comprehensive income of $5,900,000 for the same period ended March 31, 2023. The decrease was primarily related to the decrease in net income of $2,093,000.
Liquidity and Capital Resources
Historically, the Company’s primary sources of funds have been cash generated from operating activities and borrowings from third parties. Primary cash requirements are for operating expenses, capital expenditures, repayments of debt, and acquisitions. The Company from time to time will enter into foreign exchange contracts and interest rate swaps to mitigate risk of foreign exchange and interest rate volatility. As of March 31, 2024, the Company had outstanding foreign exchange contracts with notional amounts totaling $5,063,000. As of March 31, 2024, the Company had outstanding interest rate swaps with notional amounts totaling $22,917,000.
Cash provided by operating activities for the three months ended March 31, 2024 totaled $5,072,000. Net income of $3,759,000 positively impacted operating cash flows. Non-cash deductions of depreciation and amortization, and share-based compensation included in net income amounted to $3,292,000 and $739,000, respectively. Increased working capital decreased cash provided by operating activities by $2,504,000. Higher working capital was primarily related to changes in accrued liabilities and inventory offset by changes in in prepaid assets, accounts receivable and accounts payable.
Cash used in investing activities for the three months ended March 31, 2024 was $1,893,000, which related to purchases of property, plant and equipment. The Company anticipates spending approximately $13,000,000 during 2024 on property, plant and equipment purchases for all of the Company's operations. At March 31, 2024, purchase commitments for capital expenditures in progress were $2,939,000. The Company anticipates using cash from operations, its available revolving line of credit or its capex line to fund capital investments.
Cash used for financing activities for the three months ended March 31, 2024 totaled $665,000, which consisted of the purchase of treasury stock of $343,000 in exchange for payment of taxes related to net shares settlements of equity awards and repayments of long-term debt of $322,000.
At March 31, 2024, the Company had $26,618,000 cash on hand, a $25,000,000 revolving loan facility of which none is outstanding, and a $25,000,000 Capex loan facility with no outstanding balance.
The Company is required to meet certain financial covenants included in the Huntington Credit Agreement (defined below), which covenants include a net debt leverage and a fixed charge coverage ratio. As of March 31, 2024, the Company was in compliance with its financial covenants associated with the loans made under the Huntington Credit Agreement as described below.
Management believes cash on hand, cash flow from operating activities and available borrowings under the Company's credit agreement will be sufficient to meet the Company's current liquidity needs.
Huntington Credit Agreement
On July 22, 2022, the Company entered into a credit agreement (the “Huntington Credit Agreement”) with The Huntington National Bank (“Huntington”), as the sole lender, administrative agent, lead arranger and book runner, and the lenders from time to time thereto. Pursuant to the terms of the Huntington Credit Agreement, Huntington made available to the Company secured loans (the “Huntington Loans”) in the maximum aggregate principal amount of $75,000,000, comprised of three $25,000,000 commitments: a term loan commitment, a CapEx loan commitment and a revolving loan commitment.
At the option of the Company, the Huntington Loans shall be comprised of Alternative Base Rate (ABR) Loans or Secure Overnight Financing Rate (SOFR) Loans.
ABR Loans bear interest at a per annum rate equal to ABR plus a margin of 280 to 330 basis points determined based on the Company’s leverage ratio. ABR is the greatest of (a) the Prime Rate in effect on such day, (b) the Federal Funds Rate in effect on such day plus 0.50% per annum and (c) Daily Simple SOFR for such day (taking into account any floor set forth in the definition of “Daily Simple SOFR”) plus 1.00% per annum; provided, that if the ABR shall be less than 0.00%, then ABR shall be deemed to be 0.00%.
SOFR Loans bear interest at a per annum rate equal to Daily Simple SOFR plus a margin of 180 to 230 basis points determined based on the Company’s leverage ratio. Daily Simple SOFR means, for any day (a “SOFR Rate Day”), a rate per annum equal to the greater of (a) SOFR for the day (such day, the “SOFR Determination Date”) that is five (5) U.S. Government Securities Business Days prior to (i) if such SOFR Rate Day is a U.S. Government Securities Business Day, such SOFR Rate Day or (ii) if
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such SOFR Rate Day is not a U.S. Government Securities Business Day, the U.S. Government Securities Business Day immediately preceding such SOFR Rate Day, in each case, as such SOFR is published by the SOFR Administrator on the SOFR Administrator’s Website, and (b) 0.00%.
The Company’s obligations under the Huntington Credit Agreement are secured by all of the U.S. and Canadian assets of the Company, including all of its equity interests in each of the Company’s U.S. and Canadian subsidiaries and 65% of the Company’s equity interest in its Mexican subsidiaries, and are unconditionally guaranteed by certain subsidiaries of the Company.
The Huntington Credit Agreement contains certain customary representations and warranties, conditions, affirmative and negative covenants and events of default. The Company is in compliance with such covenants as of March 31, 2024.
Voluntary prepayments of amounts outstanding under the Huntington Loans are permitted at any time without premium or penalty.
The Company incurred debt origination fees of $402,000 related to the Huntington Credit Agreement, which is being amortized over the life of the agreement.
Huntington Capex Loan
Pursuant to the terms of the Huntington Credit Agreement, Huntington made available to the Company secured Capex loan (the “Huntington Capex Loan”) in the maximum aggregate principal amount of $25,000,000. Proceeds of the Huntington Capex Loan will be used to finance the ongoing capital expenditure needs of the Company.
Any borrowings from the Huntington Capex Loan will be converted to new term loans annually each February, beginning February 2025, and will have monthly principal repayments based on a sixty-month amortization period with all amounts outstanding on the Huntington Capex Loan being fully due on July 22, 2027.
Huntington Revolving Loan
Pursuant to the terms of the Huntington Credit Agreement, Huntington made available to the Company a revolving loan commitment (the “Huntington Revolving Loan”) of $25,000,000. The Company has $25,000,000 of available revolving loans of which none was outstanding as of March 31, 2024 and December 31, 2023, respectively.
The Huntington Credit Agreement makes available to the Company a revolving commitment in the maximum amount of $25,000,000 at the Company’s option at any time during the five-year period following the closing. The revolving loan commitment terminates, and all outstanding borrowings thereunder must be repaid on July 22, 2027.
The interest rate for the Huntington Revolving Loan was 7.11% and 7.11% as of March 31, 2024 and December 31, 2023, respectively.
Huntington Term Loan
Pursuant to the terms of the Huntington Credit Agreement, Huntington made available to the Company a Term Loan commitment (the “Huntington Term Loan”) of $25,000,000 ($25,000,000 of which was advanced to the Company on July 22, 2022). The Huntington Term Loan is to be repaid in monthly installments beginning August 2022 of $104,000 per month for the first 24 months, $156,000 per month for the next 24 months, $208,000 for the next 12 months and the remaining balance to be paid on July 22, 2027. The interest rate for the Huntington Term Loan was 7.11% and 7.11% as of March 31, 2024 and December 31, 2023, respectively.
Interest Rate Swap Agreement
The Company entered into an interest rate swap agreement that became effective July 22, 2022 and continues through July 2027, which was designed as a cash flow hedge for $25,000,000 of the Huntington Term Loan. Under this agreement, the Company will pay a fixed rate of 2.95% to the swap counterparty in exchange for the Term Loans daily variable SOFR. As a result the interest rate paid on the Huntington Term Loan was 4.75% as of March 31, 2024 and December 31, 2023. The fair value of the interest rate swap was an asset of $797,000 and $524,000 at March 31, 2024 and December 31, 2023, respectively.
Leaf Capital Funding
On April 24, 2020 the Company entered into a finance agreement with Leaf Capital Funding of $175,000 for equipment. The parties agreed to a fixed interest rate of 5.50% and a term of 60 months.
Off-Balance Sheet Arrangements
The Company did not have any significant off-balance sheet arrangements as of March 31, 2024 or December 31, 2023.
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The Company did not have or experience any material changes outside the ordinary course of business as to contractual obligations, including long-term debt obligations, capital lease obligations, operating lease obligations, purchase obligations or other long-term liabilities reflected in the Company’s Consolidated Balance Sheet under GAAP, as of March 31, 2024 and December 31, 2023.
Critical Accounting Policies and Estimates
For information on critical accounting policies and estimates, see Note 2, "Critical Accounting Policies and Estimates," to the consolidated financial statements included herein.
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 uses derivative financial instruments to hedge exposure to fluctuations in foreign exchange rates and interest rates.
Core Molding Technologies has the following three items that are sensitive to market risks: (1) non-hedged loans under the Huntington Credit Agreement, all of which bear a variable interest rate; (2) non-hedged foreign currency purchases in which the Company purchases Mexican Pesos and Canadian Dollars with United States Dollars to meet certain obligations; and (3) raw material purchases in which Core Molding Technologies purchases various resins, fiberglass, and metal components for use in production. The prices and availability of these materials are affected by the prices of crude oil, natural gas and other feedstocks, tariffs, as well as processing capacity versus demand.
Assuming a hypothetical 10% change in short-term interest rates, interest paid on the Term Loan would be impacted, as the interest rate on these loans is based upon SOFR. It would not, however, have a material effect on earnings before tax as the Company has entered into a hedge to offset changes in SOFR.
Assuming a hypothetical 10% decrease in the United States Dollar to Mexican Peso and Canadian Dollar exchange rate, the Company would be impacted by an increase in operating costs, which would have an adverse effect on operating margins.
Assuming a hypothetical 10% increase in commodity prices, Core Molding Technologies would be impacted by an increase in raw material costs, which would have an adverse effect on operating margins.
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.
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Part II — Other Information
Item 1. 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.
Item 1A. Risk Factors
There have been no material changes in Core Molding Technologies' risk factors from those previously disclosed in Core Molding Technologies' Annual Report on Form 10-K for the year ended December 31, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Company repurchased 17,773 shares of our common stock during the three months ended March 31, 2024. All stock was purchased to satisfy tax withholding obligations upon exercise of stock appreciation rights. Details of the repurchases of our common stock during the three months ended March 31, 2024 are included in the following table:
| 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 | ||||||||||||||||||||||
| January 1 to 31, 2024 | — | — | — | — | ||||||||||||||||||||||
| February 1 to 29, 2024 | — | — | — | — | ||||||||||||||||||||||
| March 1 to 31, 2024 | $ | 19.31 | — | — | ||||||||||||||||||||||
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
Item 6. Exhibits
See Index to Exhibits.
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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: | May 7, 2024 | By: | /s/ David L. Duvall | |||||||||||
David L. Duvall | ||||||||||||||
President, Chief Executive Officer, and Director | ||||||||||||||
Date: | May 7, 2024 | By: | /s/ John P. Zimmer | |||||||||||
John P. Zimmer | ||||||||||||||
Executive Vice President, Secretary, Treasurer and Chief Financial Officer | ||||||||||||||
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INDEX TO EXHIBIT
| Exhibit No. | Description | Location | ||||||||||||
| 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 B Junior Participating Preferred Stock as filed with the Secretary of State of Delaware on April 21, 2020 | |||||||||||||
| 3(a)(5) | Certificate of Elimination of the Series A Junior Participant Preferred Stock as filed with the Delaware Sec. of State on April 1, 2021 | |||||||||||||
| 3(b)(1) | Amended and Restated By-Laws of Core Molding Technologies, Inc. | |||||||||||||
| 3(b)(2) | Amendment No. 1 to the Amended and Restated By-Laws of Core Molding Technologies, Inc. | |||||||||||||
| 10(a) | Form Performance Restricted Stock Award Agreement | |||||||||||||
| 31(a) | Section 302 Certification by David L. Duvall, President, Chief Executive Officer, and Director | |||||||||||||
| 31(b) | Section 302 Certification by John P. Zimmer, Executive Vice President, Secretary, Treasurer, and Chief Financial Officer | |||||||||||||
| 32(a) | Certification of David L. Duvall, Chief Executive Officer of Core Molding Technologies, Inc., dated May 7, 2024, pursuant to 18 U.S.C. Section 1350 | |||||||||||||
| 32(b) | Certification of John P. Zimmer, Executive Vice President, Secretary, Treasurer and Chief Financial Officer of Core Molding Technologies, Inc., dated May 7, 2024, 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 | ||||||||||||
| 104 | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) | Filed Herein | ||||||||||||
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