ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
The Company owns three production facilities that are situated in Columbus, Ohio, Gaffney, South Carolina and Matamoros Mexico and leases a production facility in Batavia, Ohio. The Company believes that, through productive use, these facilities have adequate production capacity to meet 2011 production volume. Based on industry analysts’ forecasts for medium and heavy-duty truck production levels for 2012 and beyond, combined with recent business awards and to allow for further growth, the Company expects to add production capacity to its Matamoros facility in 2011.
The Columbus, Ohio plant is located at 800 Manor Park Drive on approximately 28.2 acres of land. The Company acquired the property at 800 Manor Park Drive in 1996 as a result of the Asset Purchase Agreement with Navistar. The 331,558 square feet of available floor space at the Columbus, Ohio plant is comprised of the following:
The Gaffney, South Carolina plant, which was opened in early 1998, is located at 24 Commerce Drive, Meadow Creek Industrial Park on approximately 20.7 acres of land. The approximate 110,900 square feet of available floor space at the Gaffney, South Carolina plant is comprised of the following:
The Matamoros, Mexico plant which was opened in mid 2009 is located at Guillermo Gonzalez Camarena y Thomas Alva Edison Manzana, Matamoros, Tamaulipas, Mexico. The facility consists of approximately 437,000 square feet on approximately 22 acres comprised of the following:
The Columbus, Ohio, Gaffney, South Carolina and Matamoros, Mexico properties are subject to liens and security interests as a result of the properties being pledged by the Company as collateral for its debt as described in Note 6 of the “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Annual Report on Form 10-K.
The Company leases a production plant in Batavia, Ohio located at 4174 Half Acre Road on approximately nine acres of land. The term of the lease is seven years through July 2012. The Company has the option to terminate the lease at any time, by providing written notice to the lessor no later than 90 days prior to the intended termination date. The Company has the option to purchase the property at the end of every lease year. The approximate 107,740 square feet of available floor space at the Batavia, Ohio plant is comprised of the following:
The Company measures facility capacity in terms of its large molding presses (2,000 tons or greater) for the Columbus, Ohio, Gaffney, South Carolina and the SMC molding portion at the Matamoros, Mexico facility. The approximate large press capacity
utilization for the molding of production products in these production facilities was 39% in the fourth quarter of both 2010 and 2009, respectively. The Company had 15 large molding presses at December 31, 2010, compared to 14 at December 31, 2009. Capacity utilization is measured on the basis of a five day, three-shifts per day operation.
The capacity of production in the Cincinnati, Ohio facility and the spray-up, hand-lay-up and RTM portion at the Matamoros, Mexico facility are not linked directly to equipment capacities, due to the nature of the products produced. Capacity of these operations is tied to available floor space and the availability of personnel. The approximate capacity utilization for these operations was 56% and 41% in the fourth quarters of 2010 and 2009, respectively.
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.
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company’s common stock is traded on the NYSE AMEX under the symbol “CMT”.
The table below sets forth the high and low sale prices of the Company for each full quarterly period within the two most recent fiscal years for which such stock was traded.
The Company’s common stock was held by 345 holders of record on March 24, 2011.
The Company made no payments of cash dividends during 2010 and 2009. The Company currently expects that its earnings will be retained to finance the growth and development of its business and does not anticipate paying dividends on its common stock in the foreseeable future.
Equity Compensation Plan Information
The following table shows certain information concerning our common stock to be issued in connection with our equity compensation plans as of December 31, 2010:
The following selected financial data are derived from the audited consolidated financial statements of the Company. The information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
ITEM 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of the federal securities laws. As a general matter, forward-looking statements are those focused upon future plans, objectives or performance as opposed to historical items and include statements of anticipated events or trends and expectations and beliefs relating to matters not historical in nature. Such forward-looking statements involve known and unknown risks and are subject to uncertainties and factors relating to Core Molding Technologies’ operations and business environment, all of which are difficult to predict and many of which are beyond Core Molding Technologies’ control. These uncertainties and factors could cause Core Molding Technologies’ actual results to differ materially from those matters expressed in or implied by such forward-looking statements.
Core Molding Technologies believes that the following factors, among others, could affect its future performance and cause actual results to differ materially from those expressed or implied by forward-looking statements made in this report: business conditions in the plastics, transportation, watercraft and commercial product industries; federal and state regulations (including engine emission regulations); general economic, social and political environments in the countries in which Core Molding Technologies operates; safety and security conditions in Mexico; dependence upon two major customers as the primary source of Core Molding Technologies’ sales revenues; recent efforts of Core Molding Technologies to expand its customer base; the actions of competitors, customers, and suppliers; failure of Core Molding Technologies’ suppliers to perform their obligations; the availability of raw materials; inflationary pressures; new technologies; regulatory matters; labor relations; the loss or inability of Core Molding Technologies to attract and retain key personnel; federal, state and local environmental laws and regulations; the availability of capital; the ability of Core Molding Technologies to provide on-time delivery to customers, which may require additional shipping expenses to ensure on-time delivery or otherwise result in late fees; risk of cancellation or rescheduling of orders; risks related to the transfer of production from Core Molding Technologies’ Columbus facility to its Matamoros facility; management’s decision to pursue new products or businesses which involve additional costs, risks or capital expenditures; and other risks identified from time-to-time in Core Molding Technologies other public documents on file with the Securities and Exchange Commission, including those described in Item 1A of this Annual Report on Form 10-K.
OVERVIEW
Core Molding Technologies is a manufacturer of sheet molding compound (“SMC”) and molder of fiberglass reinforced plastics, primarily for the medium and heavy-duty truck market, which accounted for approximately 92% and 93% of 2010 and 2009 product sales, respectively. Core Molding Technologies produces high quality fiberglass reinforced molded products and SMC materials for varied markets, including light, medium and heavy-duty trucks, automobiles and automotive aftermarkets, personal watercraft, and other commercial products. The demand for Core Molding Technologies’ products is affected by economic conditions in the United States, Canada, and Mexico. Core Molding Technologies’ manufacturing operations have a significant fixed cost component. Accordingly, during periods of changing demands, the profitability of Core Molding Technologies’ operations may change proportionately more than revenues from operations.
On December 31, 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 compression molding operations at its second facility in Gaffney, South Carolina, and in October 2001, Core Molding Technologies acquired certain assets of Airshield Corporation. As a result of this acquisition, Core Molding Technologies expanded its fiberglass molding capabilities to include the spray-up, hand-lay-up open mold processes and resin transfer (“RTM”) closed molding utilizing a vacuum infusion process. In September 2004, Core Molding Technologies acquired substantially all the operating assets of Keystone Restyling Products, Inc., a privately held manufacturer and distributor of fiberglass reinforced products for the automotive-aftermarket industry. In August 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. The Batavia, Ohio facility produces reinforced plastic products by a spray-up open mold process and resin transfer molding (“RTM”) utilizing multiple insert tooling (“MIT”) closed mold process. In June of 2009, the Company completed construction of its new 437,000 square foot production facility in Matamoros, Mexico that replaced its leased facility. In conjunction with the construction of its new facility, the Company also added compression molding operations in Matamoros, Mexico.
Core Molding Technologies recorded net income in 2010 of $2,433,000 or $0.36 per basic and $0.34 per diluted share, compared with $1,107,000 or $0.16 per basic and diluted share, in 2009. Product sales in 2010 increased 18% from 2009 product sales, which is primarily the result of increased demand from North American medium and heavy-duty truck customers as well as increased sales from recent business awards.
Negatively impacting the Company’s net income for the year ended December 31, 2010 were increases in deferred tax expense and certain other charges. In March 2010, Congress passed the Patient Protection and Affordable Care Act (“PPACA”) which repealed the tax benefits the Company previously received related to certain retiree prescription drug costs. As a result of this change, the Company reduced its deferred tax asset related to that subsidy and recorded a non-cash charge to income tax expense of $1,021,000 in the first quarter of 2010. The Company also incurred approximately $1,467,000, or $968,000, net of tax, of expense for costs associated with transferring certain operations from its Columbus, Ohio to its Matamoros, Mexico facilities. Excluding these charges, and considering the associated increase in profit sharing expense of $293,000, or $194,000 net of tax, income would have been $4,228,000, or $0.62 per basic share and $0.60 per diluted share.
In 2009 the Company recorded approximately $2,001,000, or $1,321,000 net of tax, of expense for transfer and start-up costs associated with the Company’s new production facility in Matamoros, Mexico. Excluding these costs, the Company’s 2009 net income would have been $2,428,000, or $0.36 per basic and diluted share.
Looking forward the Company anticipates 2011 sales levels to continue to increase as industry analysts are forecasting increases in truck production in 2011 as compared to 2010.
RESULTS OF OPERATIONS
2010 COMPARED WITH 2009
Sales for 2010 totaled $100,258,000, an approximate 20% increase from $83,339,000 reported for 2009. Included in total sales are tooling project revenues of $10,355,000 for 2010 and $7,172,000 for 2009. Tooling project sales result from billings to customers primarily for molds and assembly equipment specific to their products as well as other non production billings. These sales are sporadic in nature and fluctuate in regard to scope and related revenue on a period-to-period basis. Total product sales for 2010, excluding tooling project revenue, totaled $89,903,000, an 18% increase from the $76,167,000 reported for 2009. The primary reasons for the increase were higher demand from North American medium and heavy-duty truck customers as well as recent business awards. Increased demand for the Company’s existing products had a favorable impact on product sales of $8,309,000. Awards of new business had a favorable impact on product sales of $8,134,000. The increases were offset by the effects of product pricing which decreased 2010 sales by approximately $2,707,000. The decrease in pricing was primarily the result of the transfer of certain products to the Company’s Matamoros production facility.
Sales to Navistar in 2010 totaled $55,138,000, an approximate 23% increase from the 2009 amount of $44,678,000. Included in total sales are tooling sales of $7,434,000 and $3,050,000 in 2010 and 2009, respectively. Included in 2010 tooling sales were approximately $2,809,000 of billings to Navistar for services provided and expenses incurred in connection with the relocation of certain production lines from the Company’s Columbus, Ohio production facility to its Matamoros production facility. Product sales to Navistar increased by 15% in 2010 as compared to 2009. The primary reason for the increase was higher demand for North American medium and heavy-duty trucks. The increase was partially off-set by decreased pricing for certain products transferred to the Company’s Matamoros, Mexico production facility.
Sales to PACCAR in 2010 totaled $26,736,000, an approximate 11% increase from the 2009 amount of $24,184,000. Included in total sales are tooling sales of $1,632,000 and $1,069,000 in 2010 and 2009, respectively. Product sales to PACCAR increased 9% in 2010 as compared to 2009. The primary reason for the increase was higher demand from the medium and heavy-duty truck markets as noted above. Total product sales to PACCAR were negatively impacted by lower sales for a product that has reached the end of its production life, which had the effect of reducing overall PACCAR product sales increases by approximately 7%.
Sales to other customers in 2010 totaled $18,383,000, an approximate 27% increase from 2009 sales of $14,477,000. Included in sales are tooling sales of $1,288,000 and $3,053,000 in 2010 and 2009, respectively. Product sales to other customers increased by $3,907,000 in 2010 as compared to 2009, with approximately 75% of the increase resulting from increased product sales to other medium and heavy-duty truck manufacturers. The remaining increase in other product sales was due to increased
demand for the Company’s products from customers outside the medium and heavy-duty truck market.
Gross margin was approximately 16% of sales in 2010 compared to 14% of sales in 2009. Contributing approximately 3% to gross margin as a percent of sales in 2010 was higher fixed cost absorption due to higher production volumes. The Company’s manufacturing operations have significant overhead costs which do not change proportionately with production. Labor and benefit costs decreased by 2% of sales, which also contributed favorably to gross margin. The Company incurred approximately $1,467,000 in transition costs related to the movement of product lines from its Columbus, Ohio facility to its Matamoros, Mexico facility during 2010. Included in 2009 cost of sales were approximately $1,783,000 of transfer and start-up costs associated with the construction of the Company’s new production facility in Mexico. These costs had an unfavorable impact of approximately 1.5% and 2% of sales in 2010 and 2009, respectively. The decrease in transition costs contributed approximately 0.5% of sales to gross margin in 2010. Partially offsetting these increases were higher material costs and a change in sales mix in 2010 which negatively impacted gross margin by 2.5% and 1%, respectively.
Selling, general, and administrative expenses (“SG&A”) totaled $9,931,000 in 2010, increasing from $8,940,000 in 2009. The primary reason for the increase was higher benefit costs including employee profit sharing expense of $755,000. Also contributing to the increase were increases in travel costs and professional services costs of approximately $100,000 and $78,000, respectively, in 2010.
Net interest expense totaled $1,342,000 for the year ended December 31, 2010, compared to net interest expense of $951,000 for the year ended December 31, 2009. The primary cause of the increase was mark-to-market adjustments on the Company’s interest rate swaps. In 2010 approximately $234,000 of expense was recorded related to the mark to market of the Company’s interest rate swaps, compared to $210,000 of income related to interest rate swaps for 2009. Additionally, the Company capitalized interest of approximately $167,000 in 2009 related to construction of its new production facility in Mexico which was placed into service in June 2009. Excluding interest related to swaps, interest costs in 2010 were lower due to reduced interest rates as a result of a May 11, 2010 amendment to the Company’s Credit Agreement as well as lower average outstanding debt balances.
Income tax expense was approximately 52% and 28% of total income before taxes in 2010 and 2009, respectively. The increase in the Company’s effective tax rate in 2010, as compared to 2009, is due to the impact of the write off of certain deferred tax assets of $1,021,000. The deferred tax write off was due to the passage of the Patient Protection and Affordable Care Act (“PPACA”) which repealed the tax benefit associated with certain retiree prescription drug subsidies previously recorded by the Company. Without this charge the Company’s effective tax rate was 32% in 2010.
Net income for 2010 was $2,433,000 or $0.36 per basic and $0.34 per diluted share, representing an increase of $1,326,000 from the 2009 net income of $1,107,000 or $0.16 per basic and diluted share.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s primary sources of funds have been cash generated from operating activities and bank borrowings. The Company’s primary cash requirements are for operating expenses and capital expenditures.
On December 9, 2008, the Company and its wholly owned subsidiary, CoreComposites de Mexico, S. de R.L. de C.V., entered into a Credit Agreement to refinance some existing debt and borrow funds to finance the construction of the Company’s new manufacturing facility in Mexico.
Under this Credit Agreement, the Company received certain loans, subject to the terms and conditions stated in the agreement, which included (1) a $12,000,000 Capex loan; (2) an $8,000,000 Mexican loan; (3) an $8,000,000 revolving line of credit; (4) a $2,678,563 term loan to refinance an existing term loan; and (5) a letter of credit in an undrawn face amount of $3,332,493 with respect to the Company’s existing industrial development revenue bond financing. The Credit Agreement is secured by a guarantee of each U.S. subsidiary of the Company, and by a lien on substantially all of the present and future assets of the Company and its U.S. subsidiaries, except that only 65% of the stock issued by CoreComposites de Mexico, S. de C.V. has been pledged. The $8,000,000 Mexican loan is also secured by substantially all of the present and future assets of the Company’s Mexican subsidiary.
On March 8, 2010, the Company entered into the fourth amendment (the “Fourth Amendment”) to the Credit Agreement. Pursuant to the terms of the Fourth Amendment, the parties agreed to modify certain terms of the Credit Agreement. These
modifications included (1) modification of the definition EBITDA to add back transition costs of up to $2,000,000 associated with the relocation of certain products from the Company’s Columbus, Ohio facility to its Matamoros, Mexico facility, (2) modification to the fixed charge definition to exclude capital expenditures of up to $2,000,000 associated with the relocation of certain products from the Company’s Columbus, Ohio facility to its Matamoros, Mexico facility, (3) retroactive modification of the amortization schedule of the Mexican loan to forgo the principal payment due January 31, 2010 of $1,600,000 as a result of the Company limiting its borrowing to $6,400,000 instead of the full amount of the loan contemplated ($8,000,000), and (4) consent to transfer certain assets of the Company from Columbus, Ohio to Matamoros, Mexico.
On May 11, 2010, the Company entered into a fifth amendment (the “Fifth Amendment”) to the Credit Agreement. Pursuant to the terms of the Fifth Amendment, the parties agreed to modify certain terms of the Credit Agreement. These modifications included (1) a decrease in the applicable margin for interest rates to 275 basis points from 375 basis points for the Capex and Mexican loans and the revolving line of credit, effective May 1, 2010 and (2) an extension of the commitment for the revolving line of credit to April 30, 2012.
Cash provided by operating activities totaled $7,367,000. Net income contributed $2,433,000 to operating cash flow. Non-cash deductions for depreciation and amortization contributed $3,949,000 and a reduction of deferred income tax assets favorably impacted operating cash flow by $1,225,000. The partial settlement of the post retirement benefits liability used cash of approximately $1,257,000. Changes in working capital reduced cash provided by operating activities by $366,000 due to increases in accounts receivable and inventory, which were partially offset by increases in accounts payable and accrued liabilities.
Cash used for investing activities was $2,206,000 for the year ended December 31, 2010, which primarily represents additional investment made in the Company’s new manufacturing facility in Mexico as well as the acquisition of machinery and equipment at all of the Company’s production facilities. Commitments for capital expenditures were $184,000 at December 31, 2010.
Planned capital expenditures for 2011 are approximately $4,200,000. As previously discussed the Company expects to add additional capacity to its Matamoros facility to meet demand in 2012 and beyond. Given these capacity needs management is evaluating the specific production capacity requirements and is likely to commit additional capital spending of $10 million to $13 million in 2011.
Cash used in financing activities was $3,646,000 in 2010. The primary financing activities were principal payments on the capex loan, term loan and industrial revenue bond.
At December 31, 2010, the Company had cash on hand of $5,657,000 and an available line of credit of $8,000,000 (“Line of Credit”), which is scheduled to mature on April 30, 2012. At December 31, 2010 and 2009, Core Molding Technologies had no outstanding borrowings on the Line of Credit. Management expects the current cash balance along with this line of credit to be adequate to meet Core Molding Technologies’ planned liquidity needs. However, the Company may seek additional bank funding as deemed necessary to support the additional capital needs as mentioned above.
The Company is required to meet certain financial covenants included in its debt agreements with respect to leverage ratios, fixed charge ratios, capital expenditures as well as other customary affirmative and negative covenants. As of December 31, 2010, the Company was in compliance with its financial debt covenants.
Based on the Company’s forecasts which are primarily based on industry analysts’ estimates of 2011 heavy and medium-duty truck production volumes as well as other assumptions management believes to be reasonable, management believes that the Company will be able to maintain compliance with the covenants to the Credit Agreement, as amended, for the next 12 months. Management believes that cash flow from operating activities together with available borrowings under the Credit Agreement will be sufficient to meet the Company’s liquidity needs. However, 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.
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET TRANSACTIONS
The Company has the following minimum commitments under contractual obligations, including purchase obligations, as defined by the United States Securities and Exchange Commission (“SEC”). A “purchase obligation” is defined as an agreement to purchase goods or services that is enforceable and legally binding on the Company and that specifies all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. Other long-term liabilities are defined as long-term liabilities that are reflected on the Company’s balance sheet under accounting principles generally accepted in the United States. Based on this definition,
the table below includes only those contracts which include fixed or minimum obligations. It does not include normal purchases, which are made in the ordinary course of business.
The following table provides aggregated information about the maturities of contractual obligations and other long-term liabilities as of December 31, 2010:
Interest is calculated based the effective interest rates on the Company’s borrowing arrangements reflective of the interest rate swap agreements in place for the long-term borrowings. As of December 31, 2010, the Company had no off-balance sheet arrangements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s Discussion and Analysis of Financial Condition and Results of Operations discuss the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to accounts receivable, inventories, post retirement benefits, and income taxes. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.
Accounts Receivable Allowances
Management maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company had an allowance for doubtful accounts of $118,000 at December 31, 2010 and $113,000 at December 31, 2009. Management also records estimates for chargebacks such as customer returns, customer rework chargebacks, discounts offered to customers, and price adjustments. Should these customer returns, chargebacks, discounts, and price adjustments fluctuate from the estimated amounts, additional allowances may be required. The Company recorded allowances for chargebacks of $695,000 at December 31, 2010 and $519,000 at December 31, 2009.
Inventories
Inventories, which include material, labor, and manufacturing overhead, are valued at the lower of cost or market. The inventories are accounted for using the first-in, first-out (FIFO) method of determining inventory costs. Inventory quantities on-hand are regularly reviewed, and where necessary, provisions for excess and obsolete inventory are recorded based on historical and anticipated usage. The Company had an allowance for slow moving and obsolete inventory of $750,000 at December 31, 2010 and $762,000 at December 31, 2009.
Goodwill and Long-Lived Assets
Management evaluates whether impairment exists for goodwill and long-lived assets annually on December 31 or at interim periods if an indicator of impairment exists. Should actual results differ from the assumptions used to determine impairment, additional provisions may be required. In particular, decreases in future cash flows from operating activities that are below our assumptions could have an adverse effect on the Company’s ability to recover its long-lived assets. The Company has not recorded any impairment to goodwill for long-lived assets for the years ended December 31, 2010 and 2009. A 10% decrease in future cash flows would not adversely impact the net book value of goodwill and a 1% increase in the rate used to discount future cash flows would not adversely impact the net book value of goodwill.
Self-Insurance
The Company is self-insured with respect to most of its Columbus and Batavia, Ohio and Gaffney, South Carolina medical and dental claims and Columbus and Batavia, Ohio workers’ compensation claims. The Company has recorded an estimated liability for self-insured medical and dental claims incurred but not reported and worker’s compensation claims incurred but not reported at December 31, 2010 and 2009 of $1,041,000 and $944,000, respectively.
Post Retirement Benefits
Management records an accrual for post retirement costs associated with the health and life insurance 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 10 of the Consolidated Financial Statements. As described in Note 10, in August 2010, the Company eliminated its health and life insurance post retirement benefits for all current and future represented employees who had not retired as of August 7, 2010. The elimination of benefits resulted in a reduction of the Company’s post retirement health and life insurance benefits liability of $10,282,000. Core Molding Technologies had a liability for post retirement health and life insurance benefits based on actuarially computed estimates of $10,837,000 at December 31, 2010, and $18,744,000 at December 31, 2009.
Revenue Recognition
Revenue from product sales is recognized at the time products are shipped and title transfers. Allowances for returned products, chargebacks and other credits are estimated and recorded as revenue is recognized. Tooling revenue is recognized when the customer approves the tool and accepts ownership. Progress billings and expenses are shown net as an asset or liability on the Company’s balance sheet. Tooling in progress can fluctuate significantly from period to period and is dependent upon the stage of tooling projects and the related billing and expense payment timetable for individual projects and therefore does not necessarily reflect projected income or loss from tooling projects. At December 31, 2010 the Company recorded a net liability related to tooling in progress of $320,000, which represents approximately $2,697,000 of progress tooling billings and $2,377,000 of progress tooling expenses. At December 31, 2009 the Company recorded a net liability related to tooling in progress of $485,000, which represents approximately $2,424,000 of progress tooling billings and $1,939,000 of progress tooling expenses.
Income Taxes
Management records a valuation allowance to reduce its deferred tax assets to the amount that it believes is more likely than not to be realized. The Company has considered future taxable income in assessing the need for a valuation allowance and has not recorded a valuation allowance due to anticipating it being more likely than not that the Company will realize these benefits.
An analysis is performed to determine the amount of the deferred tax asset that will be realized. Such analysis is based upon the premise that the Company is and will continue as a going concern and that it is more likely than not that deferred tax benefits will be realized through the generation of future taxable income. Management reviews all available evidence, both positive and negative, to assess the long-term earnings potential of the Company using a number of alternatives to evaluate financial results in economic cycles at various industry volume conditions. Other factors considered are the Company’s relationships with its two largest customers (Navistar and PACCAR), and any recent customer diversification efforts. The projected availability of taxable income to realize the tax benefits from net operating loss carryforwards and the reversal of temporary differences before expiration of these benefits are also considered. Management believes that, with the
combination of available tax planning strategies and the maintenance of its relationships with its key customers, earnings are achievable in order to realize the net deferred tax asset of $3,910,000.
Management recognizes the financial statement effects of a tax position when it is more likely than not the position will be sustained upon examination. Management has recognized all tax positions as of December 31, 2010.
The net deferred tax asset of $3,910,000 at December 31, 2010 consists primarily of temporary differences relating to post-retirement health and life insurance benefits of $3,903,000, as well as temporary differences between the book and tax value for accrued liabilities, inventory reserves, and accounts receivable of approximately $1,467,000. These are partially offset by a deferred tax liability related to property, plant and equipment of $1,460,000.
Inflation
Inflationary factors such as increases in the cost of our product and overhead costs may adversely affect our operating results. A high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross profit and selling, general and administrative expenses as a percentage of net sales if the selling prices of our products do not increase with these increased costs.
Recent Accounting Pronouncements
In June 2009, the FASB issued authoritative guidance on the consolidation of variable interest entities (“VIE”), which was effective for our first fiscal quarter of 2010. The new guidance requires a qualitative approach to identify a controlling financial interest in a VIE, and requires ongoing assessment of whether an entity is a VIE and whether an interest in a VIE makes the holder the primary beneficiary of the VIE. The adoption of this guidance did not have a material effect on our consolidated financial statements.
ITEM 7A.
ITEM 7A.
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. Core Molding Technologies does not hold any material market risk sensitive instruments for trading purposes.
Core Molding Technologies has the following six items that are sensitive to market risks: (1) Industrial Revenue Bond (“IRB”) with a variable interest rate (although the Company has an interest rate swap to fix the interest rate at 4.89%); (2) Revolving Line of Credit and Mexican loan payable under the Credit Agreement, each of which bears a variable interest rate; (3) Capex loan payable with a variable interest rate (although the Company has an interest rate swap to fix the variable portion of the applicable interest rate at 2.3%); (4) bank Term loan under the Credit Agreement, with a variable interest rate (although the Company has an interest rate swap to fix the interest rate at 5.75%); (5) foreign currency purchases in which the Company purchases Mexican pesos with United States dollars to meet certain obligations that arise due to operations at the facility located in Mexico; and (6) raw material purchases in which Core Molding Technologies purchases various resins and fiberglass for use in production. The prices and availability of these materials are affected by the prices of crude oil and natural gas as well as processing capacity versus demand.
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.
Assuming a hypothetical 10% change in short-term interest rates, interest paid on the Company’s Line of Credit and the Mexican loan would have been impacted in 2010 and 2009. The interest rate on these loans is based upon LIBOR. Although a 10% change in short-term interest rates would impact the interest paid by the Company, it would not have a material effect on earnings before tax.
A 10% change in future interest rate curves would significantly impact the fair value of the Company’s interest rate swaps.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Core Molding Technologies, Inc.
Columbus, Ohio
We have audited the accompanying consolidated balance sheets of Core Molding Technologies, Inc. and Subsidiaries (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of income, stockholders’ equity, and cash flows for the years then ended. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule listed in the accompanying index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Core Molding Technologies, Inc. and Subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
Core Molding Technologies, Inc. and Subsidiaries
Consolidated Statements of Income
See notes to consolidated financial statements.
Core Molding Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
See notes to consolidated financial statements.
Core Molding Technologies, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
for the Years Ended December 31, 2010 and 2009
See notes to consolidated financial statements.
Core Molding Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
See notes to consolidated financial statements.
Core Molding Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Business Formation, Nature of Operations and Basis of Presentation
Core Molding Technologies, Inc. and its subsidiaries (“Core Molding Technologies” or the “Company”) operate in the plastics market in a family of products known as “reinforced plastics”. Reinforced plastics are combinations of resins and reinforcing fibers (typically glass or carbon) that are molded to shape. Core Molding Technologies operates four production facilities in Columbus, Ohio; Batavia, Ohio; Gaffney, South Carolina; and Matamoros, Mexico. The Columbus and Gaffney facilities produce reinforced plastics by compression molding sheet molding compound (“SMC”) in a closed mold process. The Batavia facility produces reinforced plastic products by a robotic spray-up open mold process and resin transfer molding (“RTM”) closed mold process utilizing multiple insert tooling (“MIT”). The Matamoros facility utilizes spray-up and hand-lay-up open mold processes, RTM and SMC closed mold process to produce reinforced plastic products. Core Molding Technologies also sells reinforced plastic products in the automotive-aftermarket industry through one of its subsidiaries, Core Automotive Technologies, doing business as Keystone Restyling Products.
The Company operates in one business segment as a manufacturer of SMC and molder of fiberglass reinforced plastics. The Company produces and sells SMC and molded products for varied markets, including light, medium, and heavy-duty trucks, automobiles and automotive aftermarket, personal watercraft, and other commercial products.
As disclosed in the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2010, the Company determined that certain of its previously filed financial statements contained an error related to the understatement of a deferred tax asset for certain retiree drug subsidies (“RDS”) available to sponsors of retiree health benefit plans that provide a benefit that is at least actuarially equivalent to the benefits under Medicare Part D. In order to assess materiality with respect to these errors, the Company considered Staff Accounting Bulletin (“SAB”) 99, Materiality and SAB 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, and determined that the impact of these errors on prior period consolidated financial statements was immaterial. Accordingly, the Company’s consolidated balance sheet as of December 31, 2009 and the related consolidated statements of income, consolidated statement of stockholders’ equity and cash flows for the year ended December 31, 2009 were revised and reflect the correction of this immaterial error. Correction of this error in the Company’s consolidated balance sheet as of December 31, 2009 resulted in an increase in deferred tax assets of approximately $1,035,000, an increase to retained earnings of approximately $618,000 and an increase to accumulated other comprehensive income of approximately $417,000. For the year ended December 31, 2009, the consolidated statement of income reflects an increase in income tax benefit of approximately $89,000, and other comprehensive income reflects an increase of $190,000. Retained earnings and accumulated other comprehensive loss as of December 31, 2008 reflect an increase of $528,000 and $317,000, respectively, due to the correction of this error.
2. Summary of Significant Accounting Policies
Principles of Consolidation - The accompanying consolidated financial statements include the accounts of all subsidiaries after elimination of all intercompany accounts, transactions, and profits.
Use of 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. Actual results could differ from those estimates.
Revenue Recognition - Revenue from product sales is recognized at the time products are shipped and title transfers. Allowances for returned products, chargebacks and other credits are estimated and recorded as revenue is recognized. Tooling revenue is recognized when the customer approves the tool and accepts ownership. Progress billings and expenses are shown net as an asset or liability on the Company’s Consolidated Balance Sheet. Tooling in progress can fluctuate significantly from period to period and is dependent upon the stage of tooling projects and the related billing and expense payment timetable for individual projects and therefore does not necessarily reflect projected income or loss from tooling projects. At December 31, 2010, the Company recorded a net liability related to tooling in progress of $320,000, which represents approximately $2,697,000 of progress tooling billings and $2,377,000 of progress tooling expenses. At December 31, 2009, the Company recorded a net liability related to tooling in progress of $485,000, which represents approximately $2,424,000 of progress tooling billings and $1,939,000 of progress tooling expenses.
Core Molding Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
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 one bank. The Company had cash on hand of $5,657,000 at December 31, 2010 and $4,142,000 at December 31, 2009.
Accounts Receivable Allowances - Management maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company had an allowance for doubtful accounts of $118,000 at December 31, 2010 and $113,000 at December 31, 2009. Management also records estimates for chargebacks such as customer returns, customer rework chargebacks, discounts offered to customers, and price adjustments. Should these customer returns, chargebacks, discounts, and price adjustments fluctuate from the estimated amounts, additional allowances may be required. The Company had an allowance for chargebacks of $695,000 at December 31, 2010 and $519,000 at December 31, 2009. There have been no material changes in the methodology of these calculations.
Inventories - Inventories are stated at the lower of cost (first-in, first-out) or market. The Company has recorded an allowance for slow moving and obsolete inventory of $750,000 at December 31, 2010 and $762,000 at December 31, 2009.
Property, Plant, and Equipment - Property, plant, and equipment are recorded at cost. 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 adjustment to the depreciation period or to the unamortized balance is warranted.
Depreciation expense was $3,841,000 and $3,705,000 for 2010 and 2009, respectively. The Company capitalized interest cost of approximately $8,000 and $167,000 for the years ended December 31, 2010 and 2009, respectively.
Long-Lived Assets - Long-lived assets consist primarily of property and equipment and goodwill. 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 and equipment on the basis of undiscounted expected future cash flows from operations before interest. For goodwill, the Company evaluates annually on December 31st whether impairment exists or at interim periods if an indicator of possible impairment exists. If impairment exists, the carrying amount of the long-lived assets is reduced to its estimated fair value, less any costs associated with the final settlement. There was no impairment of the Company’s long-lived assets for the years ended December 31, 2010 and 2009.
Income Taxes - The Company records deferred income taxes for differences between the financial reporting basis and income tax basis of assets and liabilities. A detailed breakout is located in Note 9.
Self-insurance - The Company is self-insured with respect to its Columbus and Batavia, Ohio and Gaffney, South Carolina medical and dental claims and Columbus and Batavia, Ohio workers’ compensation claims. The Company had an estimated liability for self-insured medical and dental claims and worker’s compensation claims at December 31, 2010 and 2009 of $1,041,000 and $944,000, respectively.
Fair Value of Financial Instruments - The Company’s financial instruments consist of long-term debt, interest rate swaps, accounts receivable, and accounts payable. The carrying amount of these financial instruments approximated their fair value.
In September 2006, the Financial Accounting Standards Board (“FASB”) issued a standard to define fair value, establish a framework for measuring fair value and to expand disclosures about fair value measurements. This standard did not change the requirements to apply fair value in existing accounting standards. Under this standard, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the
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Notes to Consolidated Financial Statements - (Continued)
market in which the reporting entity transacts. The standard clarifies that fair value should be based on the assumptions market participants would use when pricing the asset or liability.
To increase consistency and comparability in fair value measurements, this standard establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels. The level in the fair value hierarchy disclosed is based on the lowest level of input that is significant to the fair value measurement. The three levels of the fair value hierarchy are as follows:
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Level 1 inputs are quoted prices (unadjusted) in active markets for identical asset or liabilities that the company has the ability to access as of the reporting date.
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Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly through corroboration with observable market data.
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Level 3 inputs are unobservable inputs, such as internally developed pricing models for the asset or liability due to little or no market activity for the asset or liability.
The following table presents financial liabilities measured and recorded at fair value on the Company’s Consolidated Balance Sheets on a recurring basis and their level within the fair value hierarchy as of December 31, 2010 and December 31, 2009:
There were no non-recurring fair value measurements for the year ended December 31, 2010.
In March 2008, the FASB issued a standard to amend and expand the disclosure requirements of derivative instruments with the intent to provide users of the financial statements with an enhanced understanding of how and why an entity uses derivative instruments, how these derivatives are accounted for and how the respective reporting entity’s financial statements are affected. The Company adopted this standard on January 1, 2009.
Core Molding Technologies derivative instruments located on the Consolidated Balance Sheets were as follows:
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Notes to Consolidated Financial Statements - (Continued)
The effect of derivative instruments on the Consolidated Statements of Income was as follows:
Derivatives in Cash Flow Hedging Relationships
Derivatives not designated as hedging instruments
During 2010 and 2009, the Company did not reclassify any amounts related to its cash flow hedges from accumulated other comprehensive income (loss) to earnings due to the probability that certain forecasted transactions would not occur. As discussed in Note 6, the Company discontinued the use of hedge accounting for two of its interest rate swaps, effective March 31, 2009 for the Capex swap and January 1, 2010 for the IRB swap. The Company now records all mark to market adjustments related to these interest rate swaps within interest expense in the Company’s Consolidated Statements of Income, since the date the Company discontinued hedge accounting for each swap. It is anticipated that during the next twelve months the expiration and settlement of cash flow hedge contracts along with the amortization of losses on discontinued hedges will result in income statement recognition of amounts currently classified in accumulated other comprehensive loss of approximately $54,350, net of tax.
Concentration of Credit Risk - The Company has significant transactions with two major customers (see Note 3), which together comprised 82% and 83% of total sales in 2010 and 2009, respectively and 73% and 74% of accounts receivable at December 31, 2010 and 2009, respectively. The Company performs ongoing credit evaluations of its customers’ financial condition. The Company maintains reserves for potential bad debt losses, and such bad debt losses have been historically within the Company’s expectations. Export sales, including sales to Canada and Mexico, for products provided to certain customers’ manufacturing and service locations totaled 15% and 8% of total sales for 2010 and 2009, respectively.
Earnings Per Common Share - Basic earnings per common share is computed based on the weighted average number of common shares outstanding during the period. Diluted earnings per common share are computed similarly but include the effect of the assumed exercise of dilutive stock options and vesting of restricted stock under the treasury stock method.
Core Molding Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
The computation of basic and diluted earnings per common share is as follows:
23,000 shares at December 31, 2010 and 559,000 shares at December 31, 2009 were not included in diluted earnings per share as they were anti-dilutive.
Accumulated Other Comprehensive Income (Loss) - Accumulated other comprehensive income (loss) is comprised of the following, net of tax:
Research and Development - Research and development costs, which are expensed as incurred, totaled approximately $249,000 in 2010 and $181,000 in 2009.
Recent Accounting Pronouncements - In June 2009, the FASB issued authoritative guidance on the consolidation of variable interest entities (“VIE”), which was effective for our first fiscal quarter of 2010. The new guidance requires a qualitative approach to identify a controlling financial interest in a VIE, and requires ongoing assessment of whether an entity is a VIE and whether an interest in a VIE makes the holder the primary beneficiary of the VIE. The adoption of this guidance did not have a material effect on our consolidated financial statements.
Foreign Currency Adjustments - In conjunction with the Company’s acquisition of certain assets of Airshield Corporation, the Company established operations in Mexico. The functional currency for the Mexican operations is the United States dollar. All foreign currency asset and liability amounts are remeasured into United States dollars at end-of-period exchange rates. Income statement accounts are translated at the weighted monthly average rates. Gains and losses resulting from translation of foreign currency financial statements into United States dollars and gains and losses resulting from foreign currency transactions are included in current results of operations. Aggregate foreign currency translation and transaction gains included in selling, general and administrative expense totaled $97,059 and $104,993 in 2010 and 2009, respectively.
3. Major Customers
The Company currently has two major customers, Navistar, Inc. (“Navistar”) formerly known as International Truck & Engine Corporation, and PACCAR, Inc. (“PACCAR”). Major customers are defined as customers whose sales individually consist of more than ten percent of total sales. The loss of a significant portion of sales to Navistar, or PACCAR would have a material adverse effect on the business of the Company.
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Notes to Consolidated Financial Statements - (Continued)
The following table presents net sales for the above-mentioned customers for the years ended December 31, 2010 and 2009:
4. Foreign Operations
In conjunction with the Company’s acquisition of certain assets of Airshield Corporation on October 16, 2001, the Company established manufacturing operations in Mexico (under the Maquiladora program). The Mexican operation is a captive manufacturing facility of the Company and the functional currency is United States dollars. Essentially all sales of the Mexican operations are made to United States customers in United States dollars, which totaled $41,347,000 in 2010 and $21,385,000 in 2009. Expenses are incurred in the United States dollar and the Mexican peso. Expenses incurred in pesos include labor, utilities, supplies and materials, and amounted to approximately 25% of sales of the Matamoros facility in 2010 and 33% of sales of the Matamoros facility in 2009. In June of 2009, the Company took occupancy of a new 437,000 square foot production facility in Matamoros, Mexico that replaced its leased facility. The Company owns long-lived assets that are geographically located in Mexico, which have a net book value of $23,848,000 and $20,779,000 at December 31, 2010 and 2009, respectively. The Company’s manufacturing operation in Mexico is subject to various political, economic, and other risks and uncertainties including safety and security concerns inherent to Mexico. Among other risks, the Company’s Mexican operations are subject to domestic and international customs and tariffs, changing taxation policies, and governmental regulations.
5. Property, Plant, and Equipment
Property, plant, and equipment consisted of the following at December 31:
Core Molding Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Additions in progress at December 31, 2010 and 2009 relate to equipment purchases that were not yet completed at year end. At December 31, 2010 and 2009, commitments for capital expenditures in progress were $184,000 and $30,000, respectively. Capitalized interest for the years ended December 31, 2010 and 2009 was approximately $8,000 and $167,000, respectively.
6. Debt and Leases
On December 9, 2008, the Company and its wholly owned subsidiary, CoreComposites de Mexico, S. de R.L. de C.V., entered into a Credit Agreement to refinance some existing debt and borrow funds to finance the construction of the Company’s new manufacturing facility in Mexico.
Under this Credit Agreement, the Company received certain loans, subject to the terms and conditions stated in the agreement, which included (1) a $12,000,000 Capex loan; (2) an $8,000,000 Mexican loan; (3) an $8,000,000 revolving line of credit; (4) a $2,678,563 term loan to refinance an existing term loan; and (5) a letter of credit in an undrawn face amount of $3,332,493 with respect to the Company’s existing industrial development revenue bond financing. The Credit Agreement is secured by a guarantee of each U.S. subsidiary of the Company, and by a lien on substantially all of the present and future assets of the Company and its U.S. subsidiaries, except that only 65% of the stock issued by CoreComposites de Mexico, S. de C.V. has been pledged. The $8,000,000 Mexican loan is also secured by substantially all of the present and future assets of the Company’s Mexican subsidiary.
On March 8, 2010, the Company entered into the fourth amendment (the “Fourth Amendment”) to the Credit Agreement. Pursuant to the terms of the Fourth Amendment, the parties agreed to modify certain terms of the Credit Agreement. These modifications included (1) modification of the definition EBITDA to add back transition costs of up to $2,000,000 associated with the relocation of certain products from the Company’s Columbus, Ohio facility to its Matamoros, Mexico facility; (2) modification to the fixed charge definition to exclude capital expenditures of up to $2,000,000 associated with the relocation of certain products from the Company’s Columbus, Ohio facility to its Matamoros, Mexico facility; (3) retroactive modification of the amortization schedule of the Mexican loan to forgo the principal payment due January 31, 2010 of $1,600,000 as a result of the Company limiting its borrowing to $6,400,000 instead of the full amount of the loan contemplated ($8,000,000); and (4) consent to transfer certain assets of the Company from Columbus, Ohio to Matamoros, Mexico.
Core Molding Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
On May 11, 2010, the Company entered into a fifth amendment (the “Fifth Amendment”) to the Credit Agreement. Pursuant to the terms of the Fifth Amendment, the parties agreed to modify certain terms of the Credit Agreement. These modifications included (1) a decrease in the applicable margin for interest rates to 275 basis points from 375 basis points for the Capex and Mexican loans and the revolving line of credit, effective May 1, 2010 and (2) an extension of the commitment for the revolving line of credit to April 30, 2012.
The $12,000,000 Capex loan was a construction draw loan that converted to a seven-year term loan with fixed monthly principal payments. Borrowings made pursuant to this loan bears interest, payable monthly at 30 day LIBOR plus 275 basis points. The 30 day Libor rate was 0.26% at December 31, 2010. This loan had a balance of $9,285,714 and $11,000,000 at December 31, 2010 and 2009, respectively.
The $8,000,000 Mexican loan, was also a construction draw loan to finance the new production facility in Matamoros, Mexico that was converted to a term loan in July 2009. This commitment had an original term of five years with annual payment installments commencing January 31, 2010. During 2009, the Company elected to only borrow $6,400,000 and forego the January 31, 2010 payment. This modification of the original amortization schedule for the Mexican loan was completed with the Fourth Amendment to the credit agreement. As a result, the Company’s first payment was not due until January 31, 2011. Amounts borrowed under this loan may not be reborrowed once repaid. Borrowings made pursuant to this loan bears interest, payable annually at daily LIBOR rate plus 275 basis points. The daily Libor rate was 0.25% at December 31, 2010. The Mexican loan had a balance of $6,400,000 at December 31, 2010 and 2009.
On December 30, 2003, the Company borrowed $9,000,000 in the form of a term loan collateralized by the Company’s assets. The Credit Agreement entered into by the Company on December 9, 2008 provided for refinancing the Company’s existing balance on this note. The terms of the refinance with respect to the amortization and repayment of the principal amount of such indebtedness were unchanged. Borrowings made pursuant to the refinanced term loan will bear interest, payable monthly at 30 day LIBOR plus 200 basis points. The 30 day Libor rate was 0.26% at December 31, 2010. The term loan had a balance of $107,131 and $1,392,847 at December 31, 2010 and 2009, respectively.
Industrial Revenue Bond
In May 1998, the Company borrowed $7,500,000 through the issuance of an Industrial Revenue Bond (“IRB”). The IRB bears interest at a weekly adjustable rate and matures in April 2013. The maximum interest rate that may be charged at any time over the life of the IRB is 10%.
As security for the IRB, the Company obtained a letter of credit from a commercial bank, which has a balance of $1,998,000 as of December 31, 2010. The Credit Agreement entered into by the Company on December 9, 2008 and subsequent amendments also included a commitment for this existing letter of credit. The letter of credit can only be used to pay principal and interest on the IRB. Any borrowings made under the letter of credit bear interest at the bank’s prime rate and are secured by a lien and security interest in all of the Company’s assets. The letter of credit expires in April 2012, and the Company intends to extend the letter of credit each year as required by the IRB.
Revolving Line of Credit
At December 31, 2010, the Company had available an $8,000,000 variable rate bank revolving line of credit scheduled to mature on April 30, 2012. The line of credit bears interest at daily LIBOR plus 275 basis points. There was no balance on the bank revolving line of credit at December 31, 2010 and 2009.
Core Molding Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Annual maturities of long-term debt are as follows:
Interest Rate Swaps
In conjunction with its variable rate Industrial Revenue Bond (“IRB”), the Company entered into an interest rate swap agreement through April 2013, which was initially designated as a cash flow hedging instrument. Under this agreement, the Company pays a fixed rate of 4.89% to the bank and receives 76% of the 30-day commercial paper rate. During 2010 the Company determined this interest rate swap was no longer highly effective. As a result, the Company discontinued the use of hedge accounting effective January 1, 2010 related to this swap, and began recording mark-to-market adjustments within interest expense in the Company’s Consolidated Statement of Income. The pre-tax amount previously recognized in Accumulated Other Comprehensive Income (Loss), totaling $(199,990) as of December 31, 2009, is being amortized as an increase to interest expense of $3,384 per month, net of tax, over the remaining term of the interest rate swap agreement beginning January 2010. The fair value of the swap was a liability of $126,095 and $199,990 as of December 31, 2010 and 2009, respectively. Interest income of $73,895 for the mark-to-market adjustment of swap fair value was recorded for the year ended 2010 related to this swap. Interest income of $43,697 related to the ineffectiveness of this swap was recorded for the year ended December 31, 2009. The notional amount of the swap at December 31, 2010 and 2009 was $1,940,000 and $2,615,000, respectively.
Effective January 1, 2004, the Company entered into an interest rate swap agreement, which is designated as a cash flow hedge of the term loan. Under this agreement, the Company pays a fixed rate of 5.75% to the bank and receives LIBOR plus 200 basis points. The swap term and notional amount matches the payment schedule on the secured term loan with final maturity in January 2011. The interest rate swap is a highly effective hedge because the amount, benchmark interest rate index, term, and repricing dates of both the interest rate swap and the hedged variable interest cash flows are substantially the same. The fair value of the swap was a liability of $322 and $27,492 as of December 31, 2010 and 2009, respectively. While the Company is exposed to credit loss on its interest rate swap in the event of non-performance by the counterparty to the swap, management believes that such non-performance is unlikely to occur given the financial resources of the counterparty. The notional amount of the swap was $107,131 and $1,392,847 at December 31, 2010 and 2009, respectively.
Effective December 18, 2008, the Company entered into an interest rate swap agreement that became effective May 1, 2009 and expires in May 2016, which was designated as a cash flow hedge of the $12,000,000 Capex loan. Under this agreement, the Company pays a fixed rate of 2.295% to the counterparty and receives LIBOR. Effective March 31, 2009, the interest terms in the Company’s Credit Agreement related to the $12,000,000 Capex loan were amended. The Company determined that the interest rate swap was no longer highly effective. As a result, the Company discontinued the use of hedge accounting effective March 31, 2009 related to this swap, and began recording mark-to-market adjustments within interest expense in the Company’s Consolidated Statement of Income. The pre-tax amount previously recognized in Accumulated Other Comprehensive Income (Loss), totaling $(145,684) as of March 31, 2009, is being amortized as an increase to interest expense of $1,145 per month, net of tax, over the remaining term of the interest rate swap agreement beginning June 2009. The fair value of the swap as of December 31, 2010 and 2009 was a liability of $224,499 and an asset of $28,673, respectively. The Company recorded interest expense of $253,172 and interest income of $174,357 for mark-to-market adjustments of fair value in 2010 and 2009, respectively, related to this swap. The notional amount of the swap was $9,285,714 and $11,000,000 at December 31, 2010 and 2009, respectively.
Interest expense includes approximately $179,000 and $360,000 of expense in 2010 and 2009, respectively, for settlements related to the swaps.
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Notes to Consolidated Financial Statements - (Continued)
Bank Covenants
The Company is required to meet certain financial covenants included in its debt agreements with respect to leverage ratios, fixed charge ratios, capital expenditures as well as other customary affirmative and negative covenants. As of December 31, 2010, the Company was in compliance with its financial debt covenants for the line of credit, term loan, Capex loan Mexican loan and, the letter of credit securing the Industrial Revenue Bond.
Based on the Company’s forecasts which are primarily based on industry analysts’ estimates of 2011 heavy and medium-duty truck production volumes as well as other assumptions management believes to be reasonable, management believes that the
Company will be able to maintain compliance with the covenants as amended under all amendments to the Credit Agreement for the next 12 months. Management believes that cash flow from operating activities together with available borrowings under the Credit Agreement will be sufficient to meet Core Molding Technologies’ liquidity needs. However, if a material adverse change in the financial position of Core Molding Technologies should occur, or if actual sales or expenses are substantially different than what has been forecasted, Core Molding Technologies’ liquidity and ability to obtain further financing to fund future operating and capital requirements could be negatively impacted.
Leases
In August 2005, in conjunction with the acquisition of the Cincinnati Fiberglass Division of Diversified Glass, Inc., Core Composites Cincinnati, LLC entered into a 7-year operating lease agreement through July 2012 for the manufacturing facility located in Batavia, Ohio. The Company has the option to terminate the lease effective any time after July 31, 2006, by providing written notice to the lessor no later than 90 days prior to intended termination date. The Company has the option to purchase the property at the end of every lease year.
Total rental expense was $554,000 and $1,196,000 for 2010 and 2009, respectively. Included in rental expense are rental costs related to the use of equipment during the normal course of business under nonbinding terms. Rental expense in 2009 also includes the Company’s previously leased facility in Matamoros, Mexico which was vacated in June 2009. Future minimum operating lease payments are as follows:
7. Equity
Treasury Stock
On July 18, 2007, the Company entered into a stock repurchase agreement with Navistar, pursuant to which the Company repurchased 3,600,000 shares of the Company’s common stock, from Navistar in a privately negotiated transaction at $7.25 per share, for a total purchase price of $26,100,000. Navistar continues to be a significant stockholder of the Company’s common stock with 664,000 shares, or approximately 9.3% of the shares outstanding after the repurchase. Navistar is also the Company’s largest customer, accounting for approximately 55% of the Company’s 2010 sales. The Company used approximately $19 million of cash and $7.1 million from its revolving line of credit to fund the repurchase. The Company also incurred approximately $115,000 in costs related to the stock repurchase agreement, which were recorded as part of the cost of its treasury stock.
During 2010, employees surrendered 14,584 shares of the Company’s common stock to satisfy income tax withholding obligations in connection with the vesting of restricted stock.
Anti-takeover Measures
The Company’s Certificate of Incorporation and By-laws contain certain provisions designed to discourage specific types of transactions involving an actual or threatened change of control of the Company. These provisions, which are designed to make it more difficult to change majority control of the Board of Directors without its consent, include provisions related to
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Notes to Consolidated Financial Statements - (Continued)
removal of Directors, the approval of a merger and certain other transactions as outlined in the Certificate of Incorporation and any amendments to those provisions.
Restrictions on Transfer
On July 16, 2007, the Board of Directors approved a Shareholders Rights Plan (the “Plan”) in conjunction with the approval of the repurchase of shares of stock from Navistar. The Plan was implemented to protect the interests of the Company’s stockholders by encouraging potential buyers to negotiate directly with the Board prior to attempting a takeover. Under the Plan, each stockholder will receive a dividend of one right per share of common stock of the Company owned on the record date, July 18, 2007. The rights will not initially be exercisable until, subject to action by the Board of Directors, a person acquires 15% or more of the voting stock without approval of the Board. If the rights become exercisable, all holders except the party triggering the rights shall be entitled to purchase shares of the Company at a discount. Each right entitles the registered holder to purchase from the Company a unit consisting of one one-thousandth of a share of Series A Junior Participating Preferred Stock, par value $0.01 per share. In connection with the adoption of the Rights Agreement, on July 18, 2007, the Company filed a Certificate of Designations of Series A Junior Participating Preferred Stock with the Secretary of State of the State of Delaware.
The Company’s Certificate of Incorporation contains a provision (the “Prohibited Transfer Provision”) designed to help assure the continued availability of the Company’s previous substantial net operating loss and capital loss carryforwards by seeking to prevent an “ownership change” as defined under current Treasury Department income tax regulations. Under the Prohibited Transfer Provision, if a stockholder transfers or agrees to transfer stock, the transfer will be prohibited and void to the extent that it would cause the transferee to hold a “Prohibited Ownership Percentage” (as defined in the Company’s Certificate of Incorporation, but generally, means direct and indirect ownership of 4.5% or more of the Company’s common stock) or if the transfer would result in the transferee’s ownership increasing if the transferee had held a Prohibited Ownership Percentage within the three prior years or if the transferee’s ownership percentage already exceeds the Prohibited Ownership Percentage under applicable Federal income tax rules. The Prohibited Transfer Provision does not prevent transfers of stock between persons who do not hold a Prohibited Ownership Percentage.
8. Stock Based Compensation
Core Molding Technologies has a Long Term Equity Incentive Plan (the “2006 Plan”), as approved by the shareholders in May 2006. This 2006 Plan replaced the Long Term Equity Incentive Plan (the “Original Plan”) as originally approved by the shareholders in May 1997 and as amended in May 2000. The 2006 Plan allows for grants to directors and key 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, 2015, or the date the maximum number of available awards under the 2006 Plan have been granted.
The options that have been granted under the 2006 Plan have vesting schedules of five or nine and one-half years from the date of grant, or immediately upon change in ownership, are not exercisable after ten years from the date of grant, and were granted at prices which equal or exceed the fair market value of Core Molding Technologies common stock at the date of grant. Restricted stock granted under the 2006 Plan require the individuals receiving the grants to maintain certain common stock ownership thresholds and vest over three years or upon the date of the participants’ sixty-fifth birthday, death, disability or change in control.
Effective January 1, 2006, Core Molding Technologies adopted 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). Core Molding Technologies adopted FASB ASC 718 using the modified prospective method. Under this method, FASB ASC 718 applies to all awards granted or modified after the date of adoption. In addition, compensation expense must be recognized for any unvested stock option awards outstanding as of the date of adoption on a straight-line basis over the remaining vesting period.
Core Molding Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Stock Options
There were no grants of options in the years ended December 31, 2010 and 2009. Total compensation cost related to incentive stock options for the years ended December 31, 2010 and 2009 was $40,000 and $83,000, respectively. Compensation expense was allocated such that $38,000 and $75,000 is included in selling, general, and administrative expenses and $2,000 and $8,000 is recorded in cost of sales for the years ended December 31, 2010 and 2009, respectively. There was no tax benefit recorded for this compensation cost as the expense primarily relates to incentive stock options that do not qualify for a tax deduction until, and only if, a disqualifying disposition occurs.
During the year ended December 31, 2010, Core Molding Technologies received approximately $103,000 in cash from the exercise of stock options. The aggregate intrinsic value of these options was approximately $67,000. The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option. Tax benefit received as a result of disqualified dispositions was $29,000. There were no stock options exercised during 2009.
The following summarizes all stock option activity for the years ended December 31:
As of December 31, 2010, outstanding options had an aggregate intrinsic value of approximately $1,296,000 and a weighted average remaining contractual term of approximately three years. Vested and exercisable stock options had an aggregate intrinsic value of $1,218,000 and a weighted average remaining contractual term of approximately three years.
The following summarizes the status of, and changes to, unvested options during the years ended December 31, 2010 and 2009:
Core Molding Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
At December 31, 2010, there was $22,000 of total unrecognized compensation cost related to stock options granted under the Original Plan expected to be recognized over the weighted average remaining contractual term of approximately three years.
The following table summarizes information about stock options outstanding and exercisable as of December 31, 2010:
Restricted Stock
In May of 2006, Core Molding Technologies began awarding shares of its common stock to certain directors, officers, and key executive employees in the form of restricted stock. These awards are recorded at the market value of Core Molding Technologies’ common stock on the date of issuance and amortized ratably as compensation expense over the applicable vesting period.
The following summarizes the status of the Restricted Stock and changes during the years ended December 31:
As of December 31, 2010 there was $457,000 of total unrecognized compensation cost related to restricted stock granted. That remaining cost is expected to be recognized over the weighted average remaining contractual term of 2.3 years. The total compensation expense related to restricted stock grants during the years ended December 31, 2010 and 2009 was $311,000 and $251,000, respectively, and is recorded as selling, general, and administrative expense.
9. Income Taxes
In the first quarter of 2010 the Patient Protection and Affordable Care Act (“PPACA”) was signed into law. The PPACA changes the tax treatment related to existing RDS available to sponsors of retiree health benefit plans that provide a benefit that is at least actuarially equivalent to the benefits under Medicare Part D. As a result of the PPACA, RDS payments will effectively become taxable in tax years beginning in 2013 by requiring the amount of the subsidy received to be offset against the Company’s deduction for health care expenses. Accordingly, during the first quarter of 2010, the Company recorded a one time charge to income tax expense of $1,021,000 related to the write down of its deferred tax asset for RDS.
Core Molding Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
The Consolidated Balance Sheets include a net deferred tax asset of $3,910,000 and $7,767,000, as of December 31, 2010 and 2009, respectively. During 2010, the Company reduced its deferred tax asset by approximately $3,413,000 as a result of the remeasurement and partial settlement of the post retirement benefits liability and by approximately $1,021,000 in association with the PPACA as noted above. The reduction in deferred tax asset for the remeasurement and partial settlement was recorded as a component of other comprehensive income in 2010. The Company performs analyses to evaluate the balance of deferred tax assets that will be realized. Such analyses are based on the premise that the Company is, and will continue to be, a going concern and that it is more likely than not that deferred tax benefits will be realized through the generation of future taxable income.
Components of the provision (credit) for income taxes are as follows:
A reconciliation of the income tax provision based on the federal statutory income tax rate of 34% to the Company’s income tax provision for the years ended December 31 is as follows:
The American Jobs Creation Act provides a tax deduction calculated as a percentage of qualified income from manufacturing in the United States. The deduction percentage increases from 3% to 9% over a six-year period beginning in 2005. The amount of the deduction available to the Company in 2010 was $44,000. There was no deduction in 2009 due to a federal tax loss for 2009. In December 2004, the FASB issued a new staff position providing for this deduction to be treated as a special deduction, as opposed to a tax rate reduction. Certain tax benefits related to incentive stock options recorded directly to additional paid in capital totaled $29,000 and $0 in 2010 and 2009, respectively.
Core Molding Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Deferred tax assets consist of the following at December 31:
At December 31, 2010, a provision has not been made for U.S. taxes on accumulated undistributed earnings of approximately $3,356,000 of the Company’s Mexican subsidiary that would become payable upon repatriation to the United States. It is the intention of the Company to reinvest all such earnings in operations and facilities outside of the United States.
At December 31, 2010 and 2009 the Company had no liability for unrecognized tax benefits under guidance relating to tax uncertainties. The Company does not anticipate that the unrecognized tax benefits will significantly change within the next twelve months.
The Company files income tax returns in the U.S. federal jurisdiction, Mexico and various state jurisdictions. The Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for years before 2007 due to the expiration of the statute of limitations and is subject to income tax examinations by Mexican authorities since the Company began business in Mexico in 2001. The Company recognizes interest and/or penalties related to income tax matters in income tax expense.
10. Post Retirement Benefits
The Company provides post retirement benefits to certain of its United States employees. Costs associated with post retirement benefits include health care and life insurance expense and expense related to contributions to three 401(k) defined contribution plans. In addition, all of the Company’s United States union employees are covered under a multi- employer defined benefit pension plan administered under a collective bargaining agreement. The Company does not administer this plan and contributions are determined in accordance with provisions in the negotiated labor contract.
Prior to the acquisition of Columbus Plastics, certain of the Company’s employees were participants in Navistar’s post retirement plan. The post retirement health and life insurance plan provides healthcare and life insurance for certain employees upon their retirement, along with their spouses and certain dependents and requires cost sharing between the Company, Navistar and the participants in the form of premiums, co-payments, and deductibles. The Company and Navistar share the cost of benefits for certain employees, using a formula that allocates the cost based upon the respective portion of time that the employee was an active service participant after the acquisition of Columbus Plastics to the period of active service prior to the acquisition of Columbus Plastics.
The Company’s liability for postretirement health and life insurance benefits relates primarily to its Columbus, Ohio employee base. During the second quarter of 2010, the Company recognized a curtailment in its postretirement benefits liability of $298,000 as a result of a reduction in personnel in Columbus. This reduction in personnel was caused by a
Core Molding Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
production shift of certain product lines from the Company’s Columbus, Ohio facility to its Matamoros facility. The Plan was remeasured using a discount rate of 5.9% which is consistent with the discount rate used at December 31, 2009.
On August 7, 2010, the Company entered into a new collective bargaining agreement with represented employees at the Company’s Columbus, Ohio production facility. As part of the new agreement, the postretirement health and life insurance benefits for all current and future represented employees who had not retired as of August 7, 2010 were eliminated in exchange for a one-time cash payment totaling $1,257,000. Individuals who retired prior to August 7, 2010 remain eligible for postretirement health and life insurance benefits.
The elimination of postretirement health and life insurance benefits resulted in a reduction of the Company’s postretirement benefits liability of approximately $10,282,000. This reduction in postretirement benefits liability was treated as a negative plan amendment and will be amortized as a reduction to net periodic benefit cost over approximately twenty years, the remaining life expectancy of the remaining participants in the plan. This negative plan amendment will result in net periodic benefit cost reductions of approximately $496,000 per year in 2011 and thereafter, and lower interest costs associated with the reduced postretirement benefits liability. The Plan was remeasured using a discount rate of 5.1% at the time of the negative plan amendment.
The one-time cash payment of $1,257,000, as noted above, was made on August 19, 2010. The Company accounted for the one-time cash payment as a partial plan settlement and recorded a one-time charge of $584,000, or $330,000 net of tax, in the third quarter of 2010 to recognize a portion of the previously unrecognized actuarial losses recorded in accumulated other comprehensive income due to the partial settlement.
The funded status of the Company’s post retirement health and life insurance benefits plan as of December 31, 2010 and 2009 and reconciliation with the amounts recognized in the consolidated balance sheets are provided below.
Core Molding Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
The components of expense for all of the Company’s post retirement benefits plans are as follows:
The Company accounts for post retirement benefits under FASB ASC 715, which requires the recognition of the funded status of a defined benefit pension or post retirement plan in the consolidated balance sheets. For the year ended December 31, 2010, the Company recognized net actuarial losses of $3,273,000 on the Consolidated Balance Sheet. This amount was recorded as other comprehensive loss in the amount of $2,098,000, net of tax, for the year ended December 31, 2010. For the year ended December 31, 2009, the Company recognized net actuarial loss of $1,895,000 on the Consolidated Balance Sheet. This amount was recorded as other comprehensive loss in the amount of $1,195,000, net of tax.
During 2010 the Company recognized a reduction in its balance sheet liability of $10,282,000 as a result of a negative plan amendment, which was recorded as other comprehensive income in the amount of $6,592,000, net of tax.
Amounts not yet recognized as a component of net periodic benefit costs at December 31, 2010 and 2009 were a net prior service cost credit of $4,633,000 and a loss of $3,189,000, respectively. The amount in accumulated other comprehensive income expected to be recognized as components of net periodic post retirement cost during 2011 consists of a prior service credit of $496,000, or $318,000 net of tax, and a net loss of $219,000, or $124,000 net of tax. In addition, 2011 interest expense related to post retirement healthcare is expected to be $530,000, or $340,000 net of tax, for a total post retirement healthcare expense of approximately $254,000, or $146,000 net of tax, in 2011. The Company expects contributions in 2011 to be consistent with estimated future benefit payments as shown in the table below.
The weighted average rate of increase in the per capita cost of covered health care benefits is projected to be 7%. The rate is projected to decrease gradually to 5% by the year 2017 and remain at that level thereafter. The comparable assumptions for the prior year were 7% and 5%, respectively.
The effect of changing the health care cost trend rate by one-percentage point for each future year is as follows:
Core Molding Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
The estimated future benefit payments of the health care plan are as follows:
11. Related Party Transactions
In connection with the acquisition of Columbus Plastics, the Company and Navistar entered into a Supply Agreement. Under the terms of the Supply Agreement, Navistar agreed to purchase from the Company, and the Company agreed to sell to Navistar all of Navistar’s original equipment and service requirements for fiberglass reinforced parts using the Sheet Molding Compound process as they then existed or as they may be improved or modified. In 2008, the Company entered into a new Comprehensive Supply Agreement, effective as of June 24, 2008. On January 28, 2010, the Company entered into a First Addendum to the Comprehensive Supply Agreement, agreeing to shift production of certain products from the Company’s Columbus, Ohio facility to its Matamoros, Mexico facility, in order to meet the needs of Navistar as a result of its relocation of certain production to its Escobedo, Mexico assembly plant. Under this Comprehensive Supply Agreement, as amended, the Company continues to be the primary supplier of Navistar’s original equipment and service requirements for fiberglass reinforced parts, as long as the Company remains competitive in cost, quality and delivery, through October 31, 2013.
In 1996, the Company acquired substantially all of the assets and liabilities of the Columbus Plastics unit from Navistar, in return for a secured note, which has been repaid, and 4,264,000 shares of Common Stock of the Company. On July 18, 2007, the Company entered into a stock repurchase agreement with Navistar, pursuant to which the Company repurchased 3,600,000 shares of common stock, from Navistar as detailed in Note 7. At December 31, 2010, Navistar owned 9.3% of the Company’s outstanding common stock. Sales to Navistar were $55,138,000 in 2010 and $44,678,000 in 2009, of which $8,421,000 and $6,211,000 were included in accounts receivable as of December 31, 2010 and 2009, respectively.
12. Labor Concentration
As of December 31, 2010, the Company employed a total of 1,014 employees, which consisted of 405 employees in its United States operations and 609 employees in its Mexican operations. Of these 1,014 employees, 164 are covered by a collective bargaining agreement with the International Association of Machinists and Aerospace Workers (“IAM”), which extends to August 10, 2013, and 522 are covered by a collective bargaining agreement with Sindicato de Jorneleros y Obreros, which extends to January 16, 2013.
13. Commitments and Contingencies
From time to time, the Company is involved in litigation incidental to the conduct of its business. However, 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.
Core Molding Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
14. Quarterly Results of Operations (Unaudited)
The following is a summary of the unaudited quarterly results of operations for the years ended December 31, 2010 and 2009.
(1)
Sum of the quarters do not sum to total year due to rounding.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A(T).
ITEM 9A(T).
CONTROLS AND PROCEDURES
Disclosure 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 were 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 disclosures, 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.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, the Company’s Chief Executive Officer and Chief Financial Officer and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of the Company’s financial statements would be prevented or detected.
The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the framework and criteria established in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2010.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Changes In Internal Controls
There were no changes in internal control 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 control over financial reporting.
None.
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The information required by this Part III, Item 10 is incorporated by reference from the Company’s definitive proxy statement for its annual meeting of stockholders to be held on or about May 11, 2011, which is expected to be filed with the SEC pursuant to Regulation 14A of the Securities Exchange Act of 1934 within 120 days after the end of the fiscal year covered by this report.
The information required by this Part III, Item 11
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Part III, Item 12 is incorporated by reference from the Company’s definitive proxy statement for its annual meeting of stockholders to be held on or about May 11, 2011, which is expected to be filed with the SEC pursuant to Regulation 14A of the Securities Exchange Act of 1934 within 120 days after the end of the fiscal year covered by this report.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Part III, Item 13 is incorporated by reference from the Company’s definitive proxy statement for its annual meeting of stockholders to be held on or about May 11, 2011, which is expected to be filed with the SEC pursuant to Regulation 14A of the Securities Exchange Act of 1934 within 120 days after the end of the fiscal year covered by this report.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Part III, Item 14 is incorporated by reference from the Company’s definitive proxy statement for its annual meeting of stockholders to be held on or about May 11, 2011, which is expected to be filed with the SEC pursuant to Regulation 14A of the Securities Exchange Act of 1934 within 120 days after the end of the fiscal year covered by this report.
PART IV
ITEM 15.
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as Part of this Report:
(1) Financial Statements
The following consolidated financial statements are included in Part II, Item 8 of this Annual Report on Form 10-K:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Income for the Years Ended December 31, 2010 and 2009
Consolidated Balance Sheets as of December 31, 2010 and 2009
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2010 and 2009
Consolidated Statements of Cash Flows for the Years Ended December 31, 2010 and 2009
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
The following consolidated financial statement schedules are filed with this Annual Report on Form 10-K:
Schedule II - Valuation and Qualifying Accounts and Reserves for the years ended December 31, 2010 and 2009
All other schedules are omitted because of the absence of the conditions under which they are required.
(3) Exhibits
See Index to Exhibits filed with this Annual Report on Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
/s/ Kevin L. Barnett
Kevin L. Barnett
President, Chief Executive Officer, and Director (principal executive officer)
March 29, 2011
/s/ Herman F. Dick, Jr.
Herman F. Dick, Jr.
Vice President, Secretary, Treasurer, and Chief Financial Officer (principal financial officer and principal accounting officer)
March 29, 2011
*
Thomas R. Cellitti
Director
March 29, 2011
*
James F. Crowley
Director
March 29, 2011
*
Ralph O. Hellmold
Director
March 29, 2011
*
Malcolm M. Prine
Director
March 29, 2011
*By /s/ Herman F. Dick, Jr.
Herman F. Dick, Jr.
Attorney-In-Fact
March 29, 2011
Core Molding Technologies, Inc. and Subsidiaries
Schedule II
Consolidated valuation and qualifying accounts and reserves for the years ended December 31, 2010 and 2009.
Reserves deducted from asset to which it applies - allowance for doubtful accounts.
(A)
Amount represents uncollectible accounts written off.
INDEX TO EXHIBITS
The Asset Purchase Agreement, as filed with the SEC at 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 SEC upon request.
Indicates management contracts or compensatory plans that are required to be filed as an exhibit to this Annual Report on Form 10-K.
Certain portions of this Exhibit have been omitted intentionally subject to a confidentiality treatment request. A complete version of the Exhibit has been filed separately with the Securities and Exchange Commission.