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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended..........................December 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to _____________
Commission file number 001-12505
CORE MOLDING TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 31-1481870
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
800 Manor Park Drive, P.O. Box 28183, Columbus, Ohio 43228 - 0183
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (614) 870-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, par value $.01 American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer as
defined in Rule 12b-2 of the Securities Exchange Act of 1934. Yes [ ] No [X]
The aggregate market value of the registrant's voting and non-voting
common equity held by non-affiliates was $33,736,446 as of June 30, 2004. On
such date, the closing price of the registrant's Common Stock, as quoted on the
American Stock Exchange, was $3.45. The aggregate market value of the
registrant's voting and non-voting common equity held by non-affiliates was
$51,142,496 as of March 28, 2005. On such date, the closing price of the
registrant's Common Stock, as quoted on the American Stock Exchange, was $5.23.
The registrant had 9,778,680 shares of Common Stock outstanding as of March 28,
2005.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's 2005 definitive Proxy Statement to be filed
with the Securities and Exchange Commission no later than 120 days after the end
of the registrant's fiscal year are incorporated herein by reference in Part III
of this Form 10-K.
1
PART I
ITEM 1. DEVELOPMENT OF BUSINESS OF CORE MOLDING TECHNOLOGIES, INC.
In 1996, RYMAC Mortgage Investment Corporation ("RYMAC") incorporated Core
Molding Technologies, Inc. ("Core Molding Technologies" or the "Company"),
formerly known as Core Materials Corporation before changing its name on August
28, 2002, for the purpose of acquiring the Columbus Plastics unit of
International Truck & Engine Corporation ("International"). On December 31,
1996, RYMAC merged with the Company with the result being that the Company was
the surviving entity. Immediately after the merger, the Company acquired
substantially all the assets and liabilities of Columbus Plastics from
International in return for a secured note, which has been repaid, and 4,264,000
shares of newly issued common stock of the Company. International currently owns
43.6% of the outstanding stock of the Company.
In the first quarter of 1998, the Company opened a second compression
molding plant located in Gaffney, South Carolina as part of the Company's growth
strategy to expand its customer base. This facility provided the Company with
additional capacity and a strategic geographic location to serve both current
and prospective customers.
In October 2001, the Company incorporated Core Composites Corporation as a
wholly owned subsidiary under the laws of the State of Delaware. This entity was
established for the purpose of holding and establishing operations for Airshield
Corporation's assets, which the Company acquired on October 16, 2001 ("the
Airshield Asset Acquisition") as part of the Company's diversified growth
strategy. Airshield Corporation was a privately held manufacturer and marketer
of fiberglass reinforced plastic parts primarily for the truck and automotive
aftermarket industries. The Company purchased substantially all the assets of
Airshield Corporation through the United States Bankruptcy Court as Airshield
Corporation had been operating under Chapter 11 bankruptcy protection since
March 2001.
In conjunction with establishment of operations for the assets acquired
from Airshield Corporation, the Company also incorporated two corporations in
Mexico. In October 2001, the Company (5% owner) and Core Composites Corporation
(95% owner) incorporated Composites Services de Mexico, S. de R.L. de C.V.
("Composites Services") and Corecomposites de Mexico, S. de R.L. de C.V.
("Corecomposites") in Matamoros, Mexico. Composites Services was established to
be the employer of all Mexican national employees for the Company's operations
in Mexico. Corecomposites was organized to operate under a maquiladora program
whereby substantially all product produced is exported back to Core Composites
Corporation who sells such product to United States based external customers.
In September 2004, the Company formed Core Automotive Technologies, LLC, a
Delaware limited liability Company and wholly owned subsidiary of the Company
("Core Automotive"). Core Automotive was established for the purpose of holding
and establishing operations for Keystone Restyling, Inc., which the Company
acquired on September 27, 2004 as part of the Company's diversified growth
strategy. Keystone Restyling, Inc. was a privately held manufacturer and
marketer of fiberglass reinforced plastic parts primarily for the automotive and
light truck aftermarket industries. The Company's facility in Matamoros, Mexico
provides manufacturing services for Core Automotive Technologies.
DESCRIPTION OF BUSINESS OF CORE MOLDING TECHNOLOGIES, INC.
Certain statements under this caption of this Annual Report on Form 10-K
constitute 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; general economic conditions in the markets in
which Core Molding Technologies operates; dependence upon four major customers
as the primary source of Core Molding Technologies' sales revenues; recent
efforts of Core Molding Technologies to expand its customer base; failure of
Core Molding Technologies' suppliers to perform their contractual obligations;
the availability of raw materials; inflationary pressures;
2
new technologies; competitive and regulatory matters; labor relations; the loss
or inability of Core Molding Technologies to attract key personnel; 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; and management's decision to pursue new products or
businesses which involve additional costs, risks or capital expenditures.
Core Molding Technologies, Inc. and its subsidiaries 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. The Columbus, Ohio and Gaffney, South
Carolina facilities produce reinforced plastics by compression molding sheet
molding compound ("SMC") and Glass Mat Thermoplastic ("GMT") in a closed mold
process. As a result of the Airshield Asset Acquisition discussed above, in 2001
the Company established operations in a Matamoros, Mexico facility, which
produces reinforced plastic products by spray-up and hand-lay-up open mold
processes and a vacuum assisted resin infused (VRIM) closed mold process.
Reinforced plastics compete largely against metals and have the strength
to function well during prolonged use. Management believes that reinforced
plastic components offer many advantages over metals, including:
- heat resistance
- corrosion resistance
- lighter weight
- lower cost
- greater flexibility in product design
- part consolidation for multiple piece assemblies
- lower initial tooling costs for lower volume applications
- high strength-to-weight ratio
- dent-resistance in comparison to steel or aluminum.
The largest markets for reinforced plastics are transportation (automotive
and truck), recreational vehicles, commercial products and industrial
applications. The Company's four major customers are International, Yamaha Motor
Manufacturing Corporation ("Yamaha"), Freightliner, LLC ("Freightliner") and
Lear Corporation ("Lear"), which are supplied proprietary reinforced plastic
products for medium and heavy-duty trucks and personal watercraft. The Company
also supplies reinforced plastic products to other truck manufacturers, to
automotive manufacturers, to manufacturers of commercial products and to
wholesale distributors and other end users of aftermarket products. In general,
product growth and diversification are achieved in several different ways: (1)
resourcing of existing reinforced plastic product from another supplier by an
original equipment manufacturer ("OEM"); (2) obtaining new reinforced plastic
products through a selection process in which an OEM solicits bids; (3)
successful marketing of reinforced plastic products for previously
non-reinforced plastic applications; and (4) successful marketing of reinforced
plastic products for the automotive and light truck aftermarkets. The Company's
efforts are currently directed towards all four areas.
MAJOR COMPETITORS
The Company believes that it is one of the five largest compounders and
molders of reinforced plastics using the SMC, spray-up, hand-lay-up and VRIM
processes in the United States. The Company faces competition from a number of
other molders including, most significantly, Meridian Automotive Systems, Budd
Plastics Division, Molded Fiber Glass Companies, Goldshield, Polywheels,
Camoplast and Renee Composites. The Company believes that the Company is well
positioned to compete based primarily on manufacturing capability, product
quality, cost and delivery. However, the industry remains highly competitive and
some of the Company's competitors have greater financial resources, research and
development facilities, design engineering and manufacturing and marketing
capabilities.
MAJOR CUSTOMERS
The Company currently has four major customers, International, Yamaha,
Lear and Freightliner. The loss of a significant portion of sales to
International, Yamaha, Lear or Freightliner would have a material adverse effect
on the business of the Company.
3
RELATIONSHIP WITH INTERNATIONAL
In May 2003, the Company entered into a Comprehensive Supply Agreement,
which was effective as of November 1, 2002. Under this Comprehensive Supply
Agreement, the Company became the primary supplier of International's original
equipment and service requirements for fiberglass reinforced parts using the SMC
process, as long as the Company remains competitive in cost, quality and
delivery, effective through October 31, 2006.
International manufactures and markets medium and heavy-duty trucks,
including school buses, mid-range diesel engines and service parts in North
America and in certain export markets. Based upon publicly available
information, International delivered 96,800 class 6 through 8 trucks, including
school buses, in the United States and Canada during its fiscal 2004,
representing a 28% increase from the 75,700 units delivered in 2003.
International's market share in the combined United States and Canadian class 6
through 8 truck market was 28.1% in 2004 and 28.8% in 2003.
The Company makes products for International's Chatham (Canada) assembly
plant, its Springfield, Ohio assembly and body plants, its Garland, Texas
assembly facility, its bus facilities in Conway, Arkansas and Tulsa, Oklahoma
and its Escobedo, Mexico assembly facility. The Company works closely on new
product development with International's engineering and research personnel at
International's Fort Wayne, Indiana Technical Center. Some of the products sold
to International include hoods, air deflectors, air fairings, fenders, splash
panels, engine covers and other components.
The North American truck market in which International competes is highly
competitive and the demand for trucks is subject to considerable volatility as
it moves in response to cycles in the overall business environment and is
particularly sensitive to the industrial sector, which generates a significant
portion of the freight tonnage hauled. Truck demand also depends on general
economic conditions, among other factors. Sales to International amounted to
approximately 54%, 55% and 49% of total sales for 2004, 2003 and 2002,
respectively.
RELATIONSHIP WITH YAMAHA
The Company also assumed from International the long-standing supply
relationship between Columbus Plastics and Yamaha. The Company has supplied a
significant amount of the SMC products for Yamaha's personal watercraft since
1990.
Products produced for Yamaha include decks, hulls, hull liners, engine
hatches, bulkheads, reinforcements and SMC compound. The Company has worked
closely with Yamaha over the years to improve the surface quality of Yamaha
products and to identify new process control techniques and improved materials.
Demand for products from Yamaha is related to the level of general economic
activity and specifically to the cyclical and seasonal nature of the personal
watercraft industry among other factors.
Sales to Yamaha amounted to approximately 12%, 15% and 14% of total sales
for 2004, 2003 and 2002, respectively.
RELATIONSHIP WITH FREIGHTLINER
As a result of the Airshield Asset Acquisition, the Company began a supply
relationship with Freightliner. The Company produces hoods, air deflectors, air
fairings, splash panels and other components for Freightliner who uses such
products on its heavy and medium duty trucks.
Sales to Freightliner amounted to approximately 12%, 11% and 11% of total
sales for 2004, 2003 and 2002, respectively.
RELATIONSHIP WITH LEAR
The Company began a supply relationship with Lear in mid-2000, with sales
to Lear beginning in January 2001. The Company supplies seat backs and seat
bottoms to Lear, who produces full seat assemblies for an automotive original
equipment manufacturer. The Company also began producing mid-gates for Lear for
their assembly of an automotive original equipment manufacturer.
Sales to Lear amounted to approximately 8%, 10% and 12% of total sales for
2004, 2003 and 2002, respectively.
4
OTHER CUSTOMERS
The Company also produces products for other truck manufacturers, the
automotive after-market industries and various other customers. In 2004, sales
to these customers individually were all less than 10% of total sales.
EXPORT SALES
The Company provides products to some of its customers that have
manufacturing and service locations in Canada and Mexico. Export sales, which
are denominated in United States dollars and include sales to Canada, were
approximately $17,458,000, $17,084,000 and $22,369,000 for the years ended 2004,
2003 and 2002, respectively. These export sales dollars represent approximately
16%, 18% and 24% of total sales for 2004, 2003 and 2002, respectively.
FOREIGN OPERATIONS
As a result of the Airshield Asset Acquisition, the Company began
importing products into the United States as substantially all product produced
in the Company's Mexican facility are sold to customers in the United States.
The sales of products imported were approximately 18%, 20% and 22% of total
sales in 2004, 2003 and 2002, respectively.
The Company owns long-lived assets totaling $466,000 at December 31, 2004
that are located at the Mexican operations.
PRODUCTS
SMC COMPOUND
SMC compound is a combination of resins, fiberglass, catalysts and fillers
compounded and cured in sheet form. The sheet is then used to manufacture
compression-molded products, as discussed below and on a limited basis sold to
other molders.
The Company incorporates a sophisticated computer program that assists in
the compounding of various complex SMC formulations tailored to customer needs.
The system provides for the following:
- Control information during various production processes; and
- Data for statistical batch controls.
The Company has the capacity to manufacture approximately 48 million
pounds of SMC sheet material annually. The following table shows production of
SMC for 2004, 2003 and 2002.
SMC Pounds
Produced
Year (Millions)
- ---- ----------
2004 32
2003 27
2002 25
GLASS MAT THERMOPLASTIC
GMT compound is a combination of glass and thermoplastic resins purchased
in the form of a sheet. The GMT compound may be heated just prior to being used
to manufacture compression-molded products.
5
CLOSED MOLDED PRODUCTS
The Company produces reinforced plastic products using both compression
molding and vacuum resin infusion molding process methods of closed molding.
COMPRESSION MOLDING:
Compression molding is a process whereby SMC or Glass Mat Thermoplastic,
which is a combination of glass and thermoplastic resins, is molded to form by
matched die steel molds through which a combination of heat and pressure are
applied via a molding press. This process produces high quality, dimensionally
consistent products. This process is typically used for higher volume products,
which is necessary to justify the customers' investment in molds.
The Company currently owns or leases 17 compression-molding presses in its
Columbus, Ohio plant ranging in size from 500 to 4,500 tons. The Company also
owns or leases 11 presses in its Gaffney, South Carolina plant ranging in size
from 1,000 to 3,000 tons.
Large platen, high tonnage presses (greater than 2,000 tons) provide the
ability to compression mold very large SMC parts. The Company believes that it
possesses a significant portion of the large platen, high tonnage molding
capacity in the industry.
To enhance the surface quality and paint finish of products, the Company
uses both in-mold coating and vacuum molding processes. In-mold coating is a
manufacturing process performed by injecting a liquid over the molded part
surface and then applying pressure at elevated temperatures during an extended
molding cycle. The liquid coating serves to fill and/or bridge surface porosity
as well as provide a barrier against solvent penetration during subsequent
top-coating operations. Likewise, vacuum molding is the removal of air during
the molding cycle for the purpose of reducing the amount of surface porosity.
The Company believes that it is among the industry leaders in in-mold coating
and vacuum molding applications, based on the size and complexity of parts
molded.
VACUUM RESIN INFUSION MOLDING (VRIM):
This process employs two molds, typically a core and a cavity, similar to
matched die molding. The composite is produced by placing glass mat, chopped
strand or continuous strand fiberglass in the mold cavity in the desired
pattern. The core mold is then fitted to the cavity, and upon a satisfactory
seal, a vacuum is applied. When the proper vacuum is achieved, the resin is
injected into the mold to fill the part. Finally, the part is allowed to cure,
and then it is removed from the mold and trimmed to shape. Fiberglass reinforced
products produced from the VRIM process exhibit a high quality surface on both
sides of the part and excellent part thickness.
OPEN MOLDED PRODUCTS
The Company produces reinforced plastic products using both the spray-up
and hand-lay-up methods of open molding.
HAND-LAY-UP:
This process utilizes a shell mold, typically the cavity, where glass
cloth, either chopped strand or continuous strand glass mat, is introduced into
the cavity. Resin is then applied to the cloth and rolled out to achieve a
uniform wet-out from the glass and to remove any trapped air. The part is then
allowed to cure and removed from the mold. After removal, the part typically
undergoes trimming to achieve the net shape desired. Parts that would be
cosmetic in their end use would have a gel coat applied to the mold surface
prior to the lay-up to improve the surface quality of the finished part. Parts
produced from this process have a smooth outer surface and an unfinished, or
non-smooth, interior surface. These fiberglass reinforced products are typically
non-cosmetic components or structural reinforcements that are sold externally or
used internally as components of larger assemblies.
SPRAY-UP:
This process utilizes the same type of shell mold, but instead of using
glass cloth to produce the composite part, a chopper/spray system is employed.
Glass yarns and resin feed the chopper/spray gun. The resin coated, chopped
glass, which is approximately one inch in length, is sprayed into the mold to
the desired thickness. The resin coated glass in the mold is then rolled out to
ensure complete wet-out and to remove any trapped air. The part is then allowed
to cure, is removed from the mold and is then trimmed to the desired shape.
Parts that would be used for cosmetic purposes in their end use would typically
have a gel coat
6
applied to the mold surface prior to the resin coated glass being sprayed into
the mold to improve the surface quality of the finished part. Parts produced
from this process have a smooth outer surface and an unfinished, or non-smooth,
interior surface.
The Company currently operates twelve separate spray-up cells in the
Matamoros, Mexico facility that are capable of producing fiberglass-reinforced
products with and without gelcoat surfaces. Part sizes weigh from a few pounds
to well over a hundred pounds with surface quality tailored for the end use
application.
ASSEMBLY, MACHINING AND PAINT PRODUCTS
Many of the products molded by the Company are assembled, machined and/or
prime painted to result in a completed product used by the Company's
end-customers.
The Company has demonstrated manufacturing flexibility that accepts a
range of low volume, hand assembly and machining work to high volume, highly
automated assembly and machining systems. Robotics are used as deemed productive
for material handling, machining and adhesive applications. In addition to
conventional machining methods, water-jet cutting technology is also used where
appropriate. The Company has a prime paint operation in its Columbus, Ohio
facility, which uses an overhead conveyor to transfer product through two paint
booths and bake ovens that is used for higher volume applications. The Company
also utilizes spot paint booths and batch ovens in its facilities when
warranted. The Company contracts with outside parties when customers require
that the Company provide a finish of a top coat of paint.
RAW MATERIALS
The principal raw materials used in the compounding of SMC and the closed
and open molding processes are polyester resins, fiberglass rovings and filler.
Other significant raw materials include adhesives for assembly of molded
components and in-mold coating and prime paint for preparation of cosmetic
surfaces. Many of the raw materials used by the Company are petroleum and energy
based, and therefore, the costs of certain raw materials can fluctuate based on
changes in costs of these underlying commodities. The Company has historically
used single source, long-term (2-5 years) supply contracts, which do not include
minimum purchase requirements, as a means to attain competitive pricing and an
adequate supply of these raw materials. The Company has experienced price
increases for certain of these materials, which has caused suppliers to be
reluctant to enter into long-term contracts. Because of this, the Company
continues to reevaluate its strategy and consider alternative suppliers. Each
raw material generally has supplier alternatives, which are being evaluated as
the current contracts expire. The Company is regularly evaluating its supplier
base for certain supplies, repair items and componentry to improve its overall
purchasing position as supply of these items is generally available from
multiple sources.
BACKLOG
The Company relies on production schedules provided by its customers to
plan and implement production. These schedules are typically provided on a
weekly basis and are considered firm typically for four weeks. Some customers
can update these schedules daily for changes in demand that allow them to run
their inventories on a "just-in-time" basis. The ordered backlog was
approximately $10.4 million and $7.1 million at December 31, 2004 and 2003,
respectively, all of which the Company expects to ship within a year.
CAPACITY CONSTRAINTS
In previous years, the Company has been required to work an extended shift
and day schedule, up to a seven-day/three shift operation, to meet its
customers' production requirements. The Company has used various methods from
overtime to a weekend manpower crew to support the different shift schedules
required.
Based on recent production schedules, the Company has not had difficulty
in providing various shift schedules necessary to meet customer requirements.
See further discussion of machine and facility capacities at "Item 2
Properties" contained elsewhere in this report.
7
CAPITAL EXPENDITURES AND RESEARCH AND DEVELOPMENT
Capital expenditures totaled approximately $1.3 million, $1.4 million and
$0.7 million for 2004, 2003 and 2002, respectively. Capital expenditures consist
primarily of the purchase of production equipment to manufacture parts as well
as storage equipment, computers and office furniture and fixtures.
Product development is a continuous process at the Company. Research and
development activities focus on developing new SMC formulations, new reinforced
plastic products and improving existing products and manufacturing processes.
The Company does not maintain a separate research and development
organization or facility but uses its production equipment, as necessary, to
support these efforts and cooperates with its customers and its suppliers in its
research and development efforts. Likewise, manpower to direct and advance
research and development is integrated with the existing manufacturing,
engineering, production, and quality organizations. Management of the Company
has estimated that internal costs related to research and development activities
approximate $383,000 in 2004, $251,000 in 2003 and $270,000 in 2002.
ENVIRONMENTAL COMPLIANCE
The Company's manufacturing operations are subject to federal, state and
local environmental laws and regulations, which impose limitations on the
discharge of pollutants into the air and water and establish standards for the
treatment, storage and disposal of hazardous waste. The Company's policy is to
conduct its business with due regard for the preservation and protection of the
environment. The Company's environmental waste management involves the regular
auditing of all satellite hazardous waste accumulation points, all hazardous
waste activities and every authorized treatment, storage and disposal facility.
The Company's environmental staff also trains employees on waste management and
other environmental issues.
The Company believes that its facilities are in compliance with the
applicable federal, state and local environmental laws and regulations. In June
2003, the Ohio Environmental Protection Agency ("Ohio EPA") issued Core Molding
Technologies' final Title V Operating Permit for the Columbus, Ohio facility.
Since that time, Core Molding Technologies has substantially complied with the
requirements of this permit. Core Molding Technologies does not believe that the
cost to comply with this permit will have a material effect on its operations,
competitive position or capital expenditures through fiscal year 2005.
EMPLOYEES
As of December 31, 2004, the Company employed a total of 1,094 employees,
which consists of 502 employees in its United States operations and 592
employees in its Mexican operations. Of these 1,094 employees, 311 are covered
by a collective bargaining agreement with the International Association of
Machinists and Aerospace Workers ("IAM"), which extends to August 6, 2007, and
512 are covered by a collective bargaining agreement with Sindicato de
Jorneleros y Obreros, which extends to January 16, 2007.
PATENTS, TRADE NAMES AND TRADEMARKS
The Company will evaluate, apply for and maintain patents, trade names and
trademarks where it believes that such patents, trade names and trademarks are
reasonably required to protect its rights in its products. The Company does not
believe that any single patent, trade name or trademark or related group of such
rights is materially important to its business or its ability to compete.
SEASONALITY & BUSINESS CYCLE
The Company's business is affected annually by the production schedules of
its customers. Certain of the Company's customers typically shut down their
operations on an annual basis for a period of one to several weeks during the
Company's third quarter. Certain customers also typically shut down their
operations during the last week of December, as well. As a result, demand for
the Company's products drops significantly during the third quarter. Similarly,
demand for medium and heavy-duty trucks, personal watercraft, and automotive
products fluctuate on a cyclical and seasonal basis, causing a corresponding
fluctuation for demand of the Company's products.
8
ITEM 2. PROPERTIES.
The Company owns two production plants in the United States that are
situated in Columbus, Ohio and in Gaffney, South Carolina, respectively. The
Company believes that, through productive use, these facilities have adequate
production capacity to meet current production volume. The Company measures
molding capacity in terms of its ten large molding presses (i.e. 2,000 tons and
greater). The approximate large press capacity utilization for the molding of
production products in the Company's United States production facilities was
85%, 65%, and 65% in the fourth quarter of 2004, 2003 and 2002, respectively.
Capacity utilization is measured on the basis of a five day, three-shifts per
day operation. The Company has two additional large presses in storage, which
are not included in the capacity calculation that could be put into operation if
needed.
The Columbus, Ohio plant is located at 800 Manor Park Drive on
approximately 28.2 acres of land. The approximate 323,596 square feet of
available floor space at the Columbus, Ohio plant is comprised of the following:
Approximate
Square Feet
-----------
Manufacturing/Warehouse 307,447
Office 16,149
-------
323,596
The Company acquired the property at 800 Manor Park Drive as a result of
the Asset Purchase Agreement with International.
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:
Approximate
Square Feet
-----------
Manufacturing/Warehouse 105,700
Office 5,200
-------
110,900
The Columbus, Ohio and Gaffney, South Carolina 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 7 of the "Notes to
Consolidated Financial Statements" in Part II, Item 8 of this Form 10-K.
In conjunction with the establishment of operations in Mexico, as
discussed above, the Company leases a production plant in Matamoros, Mexico,
located at Ave. Uniones Y Michigan, Matamoros, Tamps. Mexico. The term of the
lease is ten years, with an option to renew for an additional ten years and with
an option to buy the facility at any time within the first seven years of the
lease. The lease is cancelable by the Company with six months notice. The
facility consists of approximately 313,000 square feet on approximately 12
acres. The Company's Mexican operation leases approximately 267,700 square feet
of the facility, with an option to lease additional space, comprised as follows:
Approximate
Square Feet
-----------
Manufacturing/Warehouse 264,100
Office 3,600
-------
267,700
The capacity of production in this facility is not linked directly to
equipment capacities, as in the Company's other facilities, due to the nature of
the products produced. Capacity of the facility is tied to available floor space
and the availability of personnel. The approximate capacity utilization for this
operation was 68%, 57% and 63% in the fourth quarters of 2004, 2003 and 2002,
respectively. Capacity utilization for the Matamoros' operation is measured on
the basis of a five day, two 9.6 hour shifts per day.
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ITEM 3. LEGAL PROCEEDINGS.
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 is likely to have a
material adverse effect on the Company's consolidated financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company submitted no matters to a vote of its security holders during
the fourth quarter of its fiscal year ended December 31, 2004.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's common stock is traded on the American Stock Exchange 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, as reported on the American Stock Exchange Composite
Tape.
CORE MOLDING TECHNOLOGIES, INC. High Low
- -------------------------------- ----- -----
First Quarter 2004 $4.15 $2.91
Second Quarter 2004 4.07 3.10
Third Quarter 2004 3.30 2.45
Fourth Quarter 2004 3.10 2.31
First Quarter 2003 $1.50 $1.04
Second Quarter 2003 2.60 1.25
Third Quarter 2003 3.34 1.77
Fourth Quarter 2003 3.49 2.56
The Company's common stock was held by 527 holders of record on March 28,
2005.
The Company made no payments of cash dividends during 2004 and 2003. 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.
ITEM 6. SELECTED FINANCIAL DATA.
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.
(IN THOUSANDS, YEARS ENDED DECEMBER 31,
EXCEPT PER SHARE DATA) 2004 2003 2002 2001 2000
- ----------------------- -------- ------- ------- ------- -------
Product sales $103,733 $81,295 $81,305 $68,364 $83,545
Tooling sales 8,112 11,488 12,784 4,816 1,347
-------- ------- ------- ------- -------
Net sales 111,845 92,783 94,089 73,180 84,892
Gross margin 17,309 13,898 13,511 7,859 11,915
Income (loss) before interest 6,572 4,403 4,775 (108) 2,862
and taxes
Net income (loss) 5,135 1,665 1,813 (1,860) 715
Net income (loss) per common
share: .53 .17 .19 (.19) .07
Basic .52 .17 .19 (.19) .07
Diluted
Total assets 68,960 56,152 64,076 61,307 62,785
Long term debt 11,371 12,999 23,764 26,015 26,370
Stockholders' equity 26,277 20,854 19,081 17,536 19,638
11
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; general economic conditions in the markets in
which Core Molding Technologies operates; dependence upon four major customers
as the primary source of Core Molding Technologies' sales revenues; recent
efforts of Core Molding Technologies to expand its customer base; failure of
Core Molding Technologies' suppliers to perform their contractual obligations;
the availability of raw materials; inflationary pressures; new technologies;
competitive and regulatory matters; labor relations; the loss or inability of
Core Molding Technologies to attract key personnel; 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; and management's decision to pursue new products or businesses which
involve additional costs, risks or capital expenditures.
OVERVIEW
Core Molding Technologies is a compounder of sheet molding composite
("SMC") and molder of fiberglass reinforced plastics. 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 International'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 and vacuum assisted resin infusion molding processes. 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.
RESULTS OF OPERATIONS
2004 COMPARED WITH 2003
Net sales for 2004 totaled $111,845,000, an approximate 21% increase from
the $92,783,000 reported for 2003. Included in total sales are tooling project
revenues of $8,112,000 for 2004 and $11,488,000 for 2003. Tooling project
revenues are sporadic in nature and do not represent a recurring trend. Total
product sales revenue, excluding tooling project revenue, was higher by
approximately 28% for the year ended 2004 as compared to the year ended 2003.
The primary reason for this increase was due to the positive impact general
economic conditions have had on the demand for medium and heavy-duty trucks.
Sales to International totaled $60,167,000, an approximate 18% increase from the
2003 amount of $51,205,000. The primary reason for the increase was due to the
positive impact of general economic conditions and the affect on product sales.
Tooling sales to International were approximately 54% lower in 2004 as compared
to 2003. Sales to Yamaha in 2004 amounted to $13,746,000, which was slightly
12
higher than the $13,612,000 in 2003. Sales to Freightliner totaled $13,778,000
for 2004, which was an increase of approximately 40% from the $9,820,000 for
2003. The primary reason for the increase was due to the reason noted above and
having the full impact for the year of products that went into production in the
first and second quarter of 2003.
Sales to other customers increased by approximately 33% to $24,155,000
from $18,145,000 in 2003. The increase in sales was primarily due to the
positive impact general economic conditions have had on the demand for medium
and heavy-duty trucks, as well as the addition of new customers at Core Molding
Technologies' Matamoros facility.
Gross margin was 15.5% of sales in 2004 compared to 15.0% of sales in
2003. The increase in gross margin, as a percentage of sales from the prior
year, was due to a combination of many factors. The primary reason for the
increase was due to the increase in sales volume, which enabled the Company to
better absorb its fixed costs of production. The benefit gained by the increase
in sales volume was partially offset by additional costs incurred as a result of
increases in raw material costs, primarily due to price increases for resin,
which is a significant component of SMC. Due to the cost of crude oil and
natural gas, raw material prices have increased and are expected to continue to
rise into 2005. Also offsetting the benefit gained were inefficiencies related
to material usage and the nine-day strike at the Company's Columbus plant, as
well as increases in the Company's profit sharing accruals resulting from
improved operating results.
Selling, general and administrative expenses totaled $10,737,000 in 2004,
which was greater than the $9,495,000 incurred in 2003. The increase from 2003
was primarily due to increases in professional fees and outside services and the
Company's profit sharing accruals resulting from improved operating results.
Interest expense totaled $872,000 for 2004 decreasing from $1,852,000 in
2003. The primary reason for the decrease was due to the refinancing of
long-term debt with International Truck and Engine Corporation in December 2003.
Interest rates experienced by the Company with respect to the industrial revenue
bond were favorable; however, due to the interest rate swap the Company entered
into, the interest rate is essentially fixed for this debt instrument.
Income tax expense for 2004 was approximately 10% of total income before
taxes. The Company's normal tax rate is 37%; however, the Company decreased its
valuation reserve related to its tax operating loss carryforwards. This reserve
was reduced by $1,425,000 as a result of the Company anticipating it being more
likely than not that the Company will realize these benefits. Actual tax
payments will be lower than the recorded expenses as the Company has substantial
federal tax loss carryforwards. These loss carryforwards were recorded as a
deferred tax asset. As the tax loss carryforwards are utilized to offset federal
income tax payments, the Company reduces the deferred tax asset as opposed to
recording a reduction in income tax expense.
Net income for 2004 was $5,135,000 or $.53 per basic share and $.52 per
diluted share, representing an increase of $3,470,000 from the 2003 net income
of $1,665,000 or $.17 per basic and diluted share.
2003 COMPARED WITH 2002
Net sales for 2003 totaled $92,783,000, an approximate 1% decrease from
the $94,089,000 reported for 2002. Included in total sales are tooling project
revenues of $11,488,000 for 2003 and $12,784,000 for 2002. Tooling project
revenues are sporadic in nature and do not represent a recurring trend. Sales to
International totaled $51,205,000, an approximate 12% increase from the 2002
amount of $45,823,000. The primary reason for the increase was due to revenue
from completed tooling projects. Sales to Yamaha in 2003 amounted to
$13,612,000, which was slightly higher than the $13,291,000 in 2002. Sales to
Lear for 2003 totaled $9,390,000, an approximate 20% decrease from the 2002
amount of $11,716,000. The primary reason for the decrease was due to lower
tooling project revenues of $3,173,000. This decrease was mitigated by an
increase in product sales of $497,000 primarily due to new business that began
in 2003. Sales to Freightliner totaled $9,820,000 for 2003, which was a decrease
of approximately 8% from the $10,691,000 for 2002. The primary reason for the
decrease was due to reduced demand for molded product.
Sales to other customers decreased by approximately 30% to $8,755,000 from
$12,566,000 in 2002. This decrease was primarily the result of decreased tooling
project revenue.
Gross margin was 15.0% of sales in 2003 compared to 14.4% of sales in
2002. The increase in gross margin was primarily due to a combination of many
factors including improvements in material costs, labor efficiency and repairs
and maintenance costs at the Company's Columbus, Ohio facility. This increase in
gross margin was partially offset by reduced margins at the Company's Gaffney,
South Carolina facility primarily due to operational inefficiencies that
occurred throughout the year. Also impacting the Gaffney facility's gross margin
was premium freight costs incurred in the fourth quarter of 2003 to meet a
customer production
13
schedule. Gross margins from the operations acquired in the Airshield Asset
Acquisition were generally in line with its previous results.
Selling, general and administrative expenses totaled $9,495,000 in 2003,
which was greater than the $9,237,000 incurred in 2002. The increase from 2002
was primarily due to increases in the Company's insurance by $178,000 and travel
expenses by $90,000.
Interest expense totaled $1,852,000 for 2003 decreasing from $2,025,000 in
2002. The primary reason for the decrease was due to the principal payment on
the note payable due to International that was made in the first quarter of
2003. Interest rates experienced by the Company with respect to the industrial
revenue bond were favorable; however, due to the interest rate swap the Company
entered into, the interest rate is essentially fixed for this debt instrument.
Interest income totaled $88,000 for 2003, decreasing from $133,000 for 2002
primarily due to a decrease in the interest rate earned on investments.
Income tax expense for 2003 was approximately 37% of total income before
taxes. Actual tax payments will be lower than the recorded expenses as the
Company has substantial federal tax loss carryforwards. These loss carryforwards
were recorded as a deferred tax asset. As the tax loss carryforwards are
utilized to offset federal income tax payments, the Company reduces the deferred
tax asset as opposed to recording a reduction in income tax expense.
Net income for 2003 was $1,665,000 or $.17 per basic and diluted share,
representing a decrease of $148,000 from the 2002 net income of $1,813,000 or
$.19 per basic and diluted share.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are for operating expenses and
capital expenditures. These cash requirements have historically been met through
a combination of cash flow from operations, equipment leasing, issuance of
Industrial Revenue Bonds and bank lines of credit.
Cash provided by operating activities in 2004 totaled $8,473,000. Net
income increased operating cash flows by $5,135,000. Non-cash deductions of
depreciation and amortization added $2,102,000 to positive operating cash flow.
Also adding to positive operating cash flow was an increase in accounts payable
of $7,367,000 due to timing differences. In addition, the increase in the
postretirement healthcare benefits liability of $1,185,000 is not a current cash
obligation, and this item will not be a cash obligation until retirees begin to
utilize their retirement medical benefits. Partially offsetting the above
mentioned increases in operating cash flows were increases in accounts
receivable of $6,300,000, which is primarily related to increased sales volume,
and inventories of $1,548,000, which is a result of increased production to meet
current sales volume.
Cash used for investing activities was $1,862,000 for the year ended
December 31, 2004. Capital expenditures totaled $1,320,000, which was primarily
related to the acquisition of machinery and equipment. At December 31, 2004,
commitments for capital expenditures in progress were $132,000. Capital
expenditures for 2005 are expected to be $3,476,000, primarily related to the
acquisition of machinery and equipment. Investing cash flows were also used for
the purchase of substantially all of the assets of Keystone Restyling Products,
Inc. for $544,000 (see Note 4 to the consolidated financial statements).
Financing activities reduced cash flow by $1,599,000 due to regularly
scheduled payments on the secured note payable of $1,179,000 and on the
Industrial Revenue Bond of $420,000.
At December 31, 2004, the Company had cash on hand of $5,358,000 and an
available line of credit of $7,500,000 ("Line of Credit"), which is scheduled to
mature on April 30, 2007. Management expects these resources to be adequate to
meet Core Molding Technologies' liquidity needs. As of December 31, 2004, the
Company was in compliance with its two financial debt covenants for the Line of
Credit and letter of credit securing the Industrial Revenue Bond and certain
equipment leases. The covenants relate to maintaining certain financial ratios.
Management expects Core Molding Technologies to meet these covenants for the
year 2005. However, if a material adverse change in the financial position of
Core Molding Technologies should occur, Core Molding Technologies' liquidity and
ability to obtain further financing to fund future operating and capital
requirements could be negatively impacted.
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
14
principles generally accepted in the United States. Based on this definition,
the tables below include 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 contractual
obligations and other long-term liabilities as of December 31, 2003.
2005 2006 - 2007 2008 - 2009 2010 and after Total
---------- ----------- ----------- -------------- -----------
Debt $1,736,000 $ 3,592,000 $ 3,772,000 $ 4,006,000 $13,106,000
Interest 672,000 1,118,000 781,000 487,000 3,058,000
Operating lease obligations 3,557,000 6,124,000 1,402,000 212,000 11,295,000
Contractual commitments for
capital expenditures 132,000 - - - 132,000
Postretirement benefits 32,000 143,000 305,000 7,561,000 8,041,000
---------- ----------- ----------- -------------- -----------
Total $6,129,000 $10,977,000 $ 6,260,000 $ 12,266,000 $35,632,000
Interest is calculated based on adjusting the variable interest rate to
the effective interest rate due to the swap agreements in place for both long
term borrowings.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses 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 recorded an allowance for doubtful accounts of
$235,000 at December 31, 2004 and $379,000 at December 31, 2003. Management also
records estimates for customer returns, discounts offered to customers, and for
price adjustments. Should customer returns, discounts, and price adjustments
fluctuate from the estimated amounts, additional allowances may be required. The
Company has reduced accounts receivable for chargebacks of $542,000 at December
31, 2004 and $851,000 at December 31, 2003.
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.
Goodwill and Long-Lived Assets
Management evaluates whether impairment exists for goodwill and long-lived
assets. 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 below the 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, 2004 and 2003.
15
Post retirement benefits:
Management records an accrual for postretirement costs associated with the
health care plan sponsored by Core Molding Technologies. Should actual results
differ from the assumptions used to determine the reserves, additional
provisions may be required. In particular, increases in future healthcare costs
above the assumptions could have an adverse effect on Core Molding Technologies'
operations. The effect of a change in healthcare costs is described in Note 11
of the Consolidated Notes to Financial Statements. Core Molding Technologies
recorded a liability for postretirement healthcare benefits based on actuarially
computed estimates of $8,035,000 at December 31, 2004, and $6,849,000 at
December 31, 2003.
In May 2004, the Financial Accounting Standards Board ("FASB") staff
issued FASB Staff Position 106-2, "Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and Modernization Act of
2003" (the "Act"). Core Molding Technologies adopted the provisions of the Act
in the third quarter of 2004. The adoption of the provisions of the Act
increased net income for the year ended December 31, 2004 by $258,000.
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 the
valuation allowance and the amount of the valuation allowance recorded. The
valuation allowance will be adjusted as the Company determines the actual amount
of deferred tax assets that will be realized. The Company had recorded a
valuation allowance of $0 at December 31, 2004 and $1,425,000 at December 31,
2003. In the fourth quarter of 2004, the Company eliminated this valuation
allowance due to anticipating it being more likely than not that the Company
will realize these benefits.
The deferred tax asset of $11,254,000 at December 31, 2004, primarily
includes the tax benefits associated with cumulative net operating losses of
approximately $9,743,000, temporary differences between the book and tax basis
of the Company's property and equipment of approximately $7,593,000 and
temporary differences relating to post-retirement and pension benefits of
$9,882,000.
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 three largest customers (International, Freightliner and
Yamaha), and the Company's recent customer diversification efforts and the
refinancing of notes payable at a lower interest rate. 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 $11,254,000.
INFLATION
Inflation generally affects the Company by increasing the cost of labor,
equipment and raw materials. Due to the cost of crude oil and natural gas, raw
material prices have increased and are expected to continue to rise in 2005.
These increases could have a significant impact on the future results of
operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an
amendment of ARB No. 43, Chapter 4," which clarifies the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage) and also requires that the allocation of fixed production overhead be
based on the normal capacity of the production facilities. SFAS No. 151 is
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. The Company is currently evaluating the impact of adopting this
statement but believes it will not have a material effect on the consolidated
financial statements.
In December 2004, the FASB issued revised SFAS No. 123, "Share-Based
Payment" which replaces SFAS No. 123, Accounting for Stock-Based Compensation"
and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees."
This statement, which requires the cost of all share-based payment transactions
be recognized in the financial statements, establishes fair value as the
measurement objective and requires entities to apply a fair-value-based
measurement method in accounting for share-based payment transactions.
16
The statement applies to all awards granted, modified, repurchased or cancelled
after July 1,2005, and unvested portions of previously issued and outstanding
awards. The Company is currently evaluating the impact of adopting this
statement.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Core Molding Technologies' primary market risk results from fluctuations
in interest rates. Core Molding Technologies is also exposed to changes in the
price of commodities used in its manufacturing operations 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 five items that are sensitive
to market risks: (1) Industrial Revenue Bond ("IRB") with a variable interest
rate. Core Molding Technologies has an interest rate swap to fix the interest
rate at 4.89%; (2) revolving line of credit, which bears a variable interest
rate; (3) bank note payable with a variable interest rate. Core Molding
Technologies entered into a swap agreement effective January 1, 2004, to fix the
interest rate at 5.75%; (4) foreign currency purchases in which Core Molding
Technologies purchases Mexican pesos with United States dollars to meet certain
obligations that arise due to the facility located in Mexico; and (5) raw
material purchases in which Core Molding Technologies purchases various resins
for use in production. The prices of these resins 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 in both
2004 and 2003, interest expense would not change significantly, as the interest
rate swap agreement would generally offset the impact and the use of Core
Molding Technologies' revolving line of credit was not material during 2004.
17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Core Molding Technologies, Inc. and Subsidiaries
Columbus, Ohio
We have audited the accompanying consolidated balance sheets of Core
Molding Technologies, Inc. and subsidiaries (the "Company") as of December 31,
2004 and 2003, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2004. Our audits also included the consolidated financial
statement schedules listed in the Index at Item 15. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and consolidated financial statement schedules 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 also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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, such consolidated financial statements present fairly, in
all material respects, the financial position of Core Molding Technologies, Inc.
and subsidiaries as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2004, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
/s/ Deloitte & Touche LLP
- -------------------------
DELOITTE & TOUCHE LLP
Columbus, Ohio
March 25, 2005
18
CORE MOLDING TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
2004 2003 2002
------------- ------------ ------------
NET SALES:
Products $ 103,733,524 $ 81,295,487 $ 81,305,282
Tooling 8,111,752 11,487,847 12,783,568
------------- ------------ ------------
TOTAL SALES 111,845,276 92,783,334 94,088,850
Cost of sales 92,790,526 77,587,866 79,330,177
Postretirement benefits expense 1,745,611 1,297,561 1,247,182
------------- ------------ ------------
TOTAL COST OF SALES 94,536,137 78,885,427 80,577,359
------------- ------------ ------------
GROSS MARGIN 17,309,139 13,897,907 13,511,491
------------- ------------ ------------
Selling, general and administrative expense 10,399,800 9,151,676 8,877,853
Postretirement benefits expense 337,690 343,064 358,955
------------- ------------ ------------
TOTAL SELLING, GENERAL AND ADMINISTRATIVE EXPENSE 10,737,490 9,494,740 9,236,808
------------- ------------ ------------
OTHER INCOME - - 500,000
------------- ------------ ------------
INCOME BEFORE INTEREST AND INCOME TAXES 6,571,649 4,403,167 4,774,683
Interest income 6,584 87,508 132,922
Interest expense (872,296) (1,852,065) (2,025,187)
------------- ------------ ------------
INCOME BEFORE INCOME TAXES 5,705,937 2,638,610 2,882,418
Income taxes:
Current 602,188 401,711 55,573
Deferred (30,901) 571,640 1,013,538
------------- ------------ ------------
TOTAL INCOME TAXES 571,287 973,351 1,069,111
------------- ------------ ------------
NET INCOME $ 5,134,650 $ 1,665,259 $ 1,813,307
============= ============ ============
NET INCOME PER COMMON SHARE:
BASIC $ 0.53 $ 0.17 $ 0.19
============= ============ ============
DILUTED $ 0.52 $ 0.17 $ 0.19
============= ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC 9,778,680 9,778,680 9,778,680
============= ============ ============
DILUTED 9,820,946 9,778,680 9,778,680
============= ============ ============
See notes to consolidated financial statements.
19
CORE MOLDING TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
2004 2003
------------ ------------
ASSETS
Current assets:
Cash $ 5,358,246 $ 346,191
Accounts receivable (less allowance for doubtful accounts:
2004 - $235,000 and 2003 - $379,000) 19,130,835 12,830,356
Inventories:
Finished and work in process goods 3,893,886 2,028,702
Stores 2,650,610 2,823,243
------------ ------------
Total inventories 6,544,496 4,851,945
Deferred tax asset 1,892,238 1,381,935
Foreign sales tax receivable 1,450,299 1,746,698
Prepaid expenses and other current assets 822,676 408,467
------------ ------------
Total current assets 35,198,790 21,565,592
Property, plant and equipment 45,387,577 43,856,499
Accumulated depreciation (22,657,889) (20,647,567)
------------ ------------
Property, plant and equipment - net 22,729,688 23,208,932
Deferred tax asset 9,361,558 9,888,287
Goodwill 1,097,433 1,097,433
Customer List 235,211 -
Other assets 337,782 391,279
------------ ------------
TOTAL $ 68,960,462 $ 56,151,523
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities:
Current portion long-term debt $ 1,735,714 $ 1,905,714
Current portion deferred gain 453,555 453,555
Accounts payable 14,055,397 6,581,912
Accrued liabilities:
Compensation and related benefits 3,664,949 2,669,027
Interest 101,132 77,104
Taxes 454,618 361,215
Current portion of graduated lease payments 229,269 229,269
Professional fees 147,865 236,055
Other 826,535 507,525
------------ ------------
Total current liabilities 21,669,034 13,021,376
Long-term debt 11,370,711 12,999,286
Interest rate swaps 474,658 610,142
Graduated lease payments 486,346 715,616
Deferred gain 648,053 1,101,607
Postretirement benefits liability 8,034,774 6,849,418
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock - $0.01 par value, authorized shares - 10,000,000;
outstanding shares: 2004 and 2003 - 0 - -
Common stock - $0.01 par value, authorized shares - 20,000,000;
outstanding shares: 2004 and 2003 - 9,778,680 97,787 97,787
Paid-in capital 19,451,392 19,251,392
Accumulated other comprehensive loss, net of income tax benefit (314,536) (402,694)
Retained earnings 7,042,243 1,907,593
------------ ------------
Total stockholders' equity 26,276,886 20,854,078
------------ ------------
TOTAL $ 68,960,462 $ 56,151,523
============ ============
See notes to consolidated financial statements.
20
CORE MOLDING TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
ACCUMULATED
COMMON STOCK RETAINED OTHER TOTAL
OUTSTANDING PAID-IN EARNINGS COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) INCOME (LOSS) EQUITY
--------- ----------- ----------- ----------- ------------- ------------
BALANCE AT JANUARY 1, 2002 9,778,680 $ 97,787 $19,251,392 $(1,570,973) $ (242,105) $ 17,536,101
Net Income 1,813,307 1,813,307
Hedge accounting effect of the
interest rate swap, net of deferred
tax benefit of $138,247 (268,361) (268,361)
------------
Comprehensive Income 1,544,946
--------- ----------- ----------- ----------- ------------- ------------
BALANCE AT DECEMBER 31, 2002 9,778,680 97,787 19,251,392 242,334 (510,466) 19,081,047
Net Income 1,665,259 1,665,259
Hedge accounting effect of the
interest rate swap, net of deferred
tax expense of $55,519 107,772 107,772
------------
Comprehensive Income 1,733,031
--------- ----------- ----------- ----------- ------------- ------------
BALANCE AT DECEMBER 31, 2003 9,778,680 97,787 19,251,392 1,907,593 (402,694) 20,854,078
Net Income 5,134,650 5,134,650
Forgiveness of related party debt 200,000 200,000
Hedge accounting effect of the
interest rate swap, net of deferred
tax expense of $45,415 88,158 88,158
------------
Comprehensive Income 5,422,808
--------- ----------- ----------- ----------- ------------- ------------
BALANCE AT DECEMBER 31, 2004 9,778,680 $ 97,787 $19,451,392 $ 7,042,243 $ (314,536) $ 26,276,886
========= =========== =========== =========== ============= ============
See notes to consolidated financial statements.
21
CORE MOLDING TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
2004 2003 2002
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,134,650 $ 1,665,259 $ 1,813,307
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 2,102,102 2,162,126 2,088,591
Deferred income taxes (30,901) 571,640 1,013,538
Loss on disposal of assets 16,600 89,333 22,794
Amortization of deferred gain (453,554) (453,555) (453,554)
Loss (gain) on translation of foreign currency financial statements 975 119,930 (48,622)
Change in operating assets and liabilities:
Accounts receivable (6,300,066) (1,549,296) 665,077
Inventories (1,548,401) (726,333) (223,617)
Prepaid expenses and other assets (115,104) 63,735 (514,638)
Accounts payable 7,366,659 1,467,258 1,357,920
Accrued and other liabilities 1,114,903 (453,408) (683,320)
Postretirement benefits liability 1,185,239 887,503 950,848
------------- ------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,473,102 3,844,192 5,988,324
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (1,319,758) (1,368,701) (680,873)
Acquisition of Keystone Restyling (544,150) - -
Proceeds from maturities on mortgage-backed security investment 1,434 4,791 829,452
------------- ------------- -------------
NET CASH PROVIDED (USED IN) INVESTING ACTIVITIES (1,862,474) (1,363,910) 148,579
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in bank note payable - 9,000,000 -
Payment of principal on secured note payable - International Truck &
Engine Corporation - (19,720,150) -
Payment of principal on bank note (1,178,573) - -
Payment of principal on industrial revenue bond (420,000) (390,000) (355,000)
------------- ------------- -------------
NET CASH USED IN FINANCING ACTIVITIES (1,598,573) (11,110,150) (355,000)
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,012,055 (8,629,868) 5,781,903
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 346,191 8,976,059 3,194,156
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,358,246 $ 346,191 $ 8,976,059
============= ============= =============
Cash paid for:
Interest (net of amounts capitalized) $ 842,154 $ 1,819,492 $ 1,935,994
============= ============= =============
Income taxes (refund) $ 361,100 $ (173,907) $ (3,302)
============= ============= =============
Non-cash transactions:
Note payable - International Truck & Engine Corporation $ (200,000) $ 200,000 $ -
============= ============= =============
See notes to consolidated financial statements.
22
CORE MOLDING TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS FORMATION AND NATURE OF OPERATIONS
Core Molding Technologies, Inc. (the "Company") was formed in 1996 for the
purpose of acquiring substantially all the assets and assuming certain of the
liabilities of Columbus Plastics Operation ("Columbus Plastics"), an operating
unit of Navistar International Transportation Corp. (now known as International
Truck & Engine Corporation, "International"). In October 2001, the Company
acquired certain assets of Airshield Corporation ("the Airshield Asset
Acquisition"). As a result of this acquisition, the Company expanded its
fiberglass molding capabilities to include the spray up, hand lay up and vacuum
assisted resin infused molding processes. In September of 2004, the Company
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.
The Company operates in one business segment as a compounder of sheet
molding composites ("SMC") and molder of fiberglass reinforced plastics. The
Company produces and sells both SMC compound and molded products for varied
markets, including light, medium and heavy-duty trucks, automobiles and
automotive aftermarkets, personal watercraft and other commercial products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
statements include the accounts of all subsidiaries after elimination of all
material intercompany accounts, transactions and profits. All significant
intercompany transactions have been eliminated.
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 and
other credits are estimated and recorded as revenue is recognized. Tooling
revenue is recognized when the customer approves the tool and accepts ownership.
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.
INVENTORIES - Inventories are stated at the lower of cost (first-in,
first-out) or market. The Company had recorded an allowance for slow moving and
obsolete inventory of $670,000 at December 31, 2004 and $325,000 at December 31,
2003.
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.
Ranges of estimated useful lives for computing depreciation are as
follows:
Land improvements 20 years
Building and improvements 20-40 years
Machinery and equipment 3-15 years
Tools, dies and patterns 3-5 years
Depreciation expense was $2,041,000, $2,153,000 and $1,983,000 for 2004,
2003, and 2002. In 2004, 2003 and 2002, approximately $0, $33,000 and $0 of
interest costs were capitalized in property, plant and equipment.
DEFERRED GAIN - Deferred gains resulted from sales leaseback transactions
that occurred in 1997 and 1998 and are being amortized over the lease period.
23
CORE MOLDING TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LONG-LIVED ASSETS - Long-lived assets consist primarily of property and
equipment, goodwill and a customer list. 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 and the customer list on
the basis of undiscounted expected future cash flows from operations before
interest. For goodwill, the Company evaluates whether impairment exists on the
basis of estimated fair value of the associated reporting unit. 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. For the years
ended December 31, 2004, 2003 and 2002, there was no impairment of the Company's
long-lived assets.
SELF-INSURANCE - The Company is self-insured with respect to most of its
medical and dental claims and 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, 2004, and 2003 of $931,000 and $860,000, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's financial instruments
consist of a mortgage backed security investment, long term debt, an interest
rate swap, accounts receivable and accounts payable. The carrying amount of
these financial instruments approximated their fair value.
CONCENTRATION OF CREDIT RISK - The Company has significant transactions
with four major customers (see Note 3), which together comprised 86%, 91% and
87% of total sales in 2004, 2003 and 2002, respectively and 85% and 82% of the
accounts receivable balances at December 31, 2004 and 2003, 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 16%, 18% and 24%
of total sales for 2004, 2003 and 2002, 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 under the treasury
stock method.
The computation of basic and diluted earnings per common share is as
follows:
YEARS ENDED DECEMBER 31,
2004 2003 2002
---------- ---------- ----------
Net income $5,134,650 $1,665,259 $1,813,307
Weighted average common shares outstanding 9,778,680 9,778,680 9,778,680
Plus: dilutive options assumed exercised 146,680 0 0
Less: shares assumed repurchased with proceeds from
exercise 104,414 0 0
---------- ---------- ----------
Weighted average common and potentially issuable
common shares outstanding 9,820,946 9,778,680 9,778,680
Basic earnings per common share $ 0.53 $ 0.17 $ 0.19
Diluted earnings per common share $ 0.52 $ 0.17 $ 0.19
1,058,000 shares at December 31, 2004, 214,000 shares at December 31, 2003
and 1,209,000 shares at December 31, 2002 were not included in diluted earnings
per share as they were anti-dilutive.
24
CORE MOLDING TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
STOCK BASED COMPENSATION - The Company accounts for its stock option plans
in accordance with Accounting Principles Board ("APB") Opinion No. 25, under
which no compensation cost has been recognized. Had compensation cost for all
stock option plans been determined consistent with the fair value method
prescribed by Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock Based Compensation," the Company's net income and earnings
per common share would have resulted in the amounts as reported below.
YEARS ENDED DECEMBER 31,
2004 2003 2002
------------- ------------- -------------
Net income as reported $ 5,134,650 $ 1,665,259 $ 1,813,307
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (204,089) (148,135) (279,977)
------------- ------------- -------------
Pro forma net income $ 4,930,561 $ 1,517,124 $ 1,533,330
============= ============= =============
Earnings per share:
Basic- as reported $ 0.53 $ 0.17 $ 0.19
Diluted- as reported $ 0.52 $ 0.17 $ 0.19
Basic- pro forma $ 0.50 $ 0.16 $ 0.16
Diluted- pro forma $ 0.50 $ 0.16 $ 0.16
The pro forma amounts are not representative of the effects on reported
net earnings or earnings per common share for future years. On August 4, 2003,
of the 1,171,500 stock options outstanding, 978,000 options were tendered for
cancellation. The Company issued 885,950 options on February 9, 2004 at $3.21
per share.
OTHER INCOME - Effective September 3, 2002, the Company changed its ticker
symbol on the American Stock Exchange from "CME" to "CMT". This change took
place because another corporation purchased the rights to use "CME" from the
Company for $500,000, which is included in other income in the consolidated
statements of operations.
RESEARCH AND DEVELOPMENT - Research and Development costs, which are
expensed as incurred, totaled approximately $383,000 in 2004, $251,000 in 2003
and $270,000 in 2002.
RECENT ACCOUNTING PRONOUNCEMENTS - In November 2004, the FASB issued SFAS
No. 151, "Inventory Costs - an amendment of ARB No. 43, Chapter 4," which
clarifies the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage) and also requires that the
allocation of fixed production overhead be based on the normal capacity of the
production facilities. SFAS No. 151 is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. The Company is currently
evaluating the impact of adopting this statement but believes it will not have a
material effect on the consolidated financial statements.
In December 2004, the FASB issued revised SFAS No. 123, "Share-Based
Payment" which replaces SFAS No. 123, Accounting for Stock-Based Compensation"
and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees."
This statement, which requires the cost of all share-based payment transactions
be recognized in the financial statements, establishes fair value as the
measurement objective and requires entities to apply a fair-value-based
measurement method in accounting for share-based payment transactions. The
statement applies to all awards granted, modified, repurchased or cancelled
after July 1, 2005, and unvested portions of previously issued and outstanding
awards. The Company is currently evaluating the impact of adopting this
statement.
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 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) losses included in operations totaled
($148,782) in 2004, $119,930 in 2003 and ($48,622) in 2002.
25
CORE MOLDING TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. MAJOR CUSTOMERS
The Company currently has four major customers, International Truck &
Engine Corporation ("International"), Yamaha Motor Manufacturing Corporation
("Yamaha"), Freightliner, LLC ("Freightliner"), and Lear Corporation ("Lear").
The following table presents net sales for the above-mentioned customers for the
years ended December 31, 2004, 2003 and 2002:
2004 2003 2002
------------- ------------ ------------
International $ 60,166,811 $ 51,205,429 $ 45,823,311
Yamaha 13,745,795 13,612,040 13,291,332
Freightliner 13,777,832 9,820,473 10,691,302
Lear 8,401,539 9,390,216 11,716,455
------------ ------------ ------------
Subtotal 96,091,977 84,028,158 81,522,400
Other 15,753,299 8,755,176 12,566,450
------------ ------------ ------------
Total $111,845,276 $ 92,783,334 $ 94,088,850
============ ============ ============
4. ACQUISITION OF KEYSTONE RESTYLING
In September 2004, the Company purchased substantially all of the assets
consisting primarily of inventory and equipment, of Keystone Restyling Products,
Inc. for $544,150. The Company may be required to pay contingent cash payments
based on certain earnings threshold of the acquired business during the
three-year period beginning January 1, 2005, and continuing through December 31,
2007. Such additional costs will be recorded as an intangible asset.
The acquisition was recorded using the purchase method of accounting.
Accordingly, the purchase price has been allocated to tangible and identified
intangible assets acquired based on a preliminary estimate of the fair values at
the date of acquisition. If the acquisition had occurred at January 1, 2004, the
operating results of Keystone Restyling Products, Inc. would not have been
significant to the Company.
The following table presents the allocation of the purchase price:
Inventory $145,110
Property and equipment 151,450
Customer list 247,590
--------
Total purchase price $544,150
========
The Company will amortize the customer list on a straight-line basis over
sixty months. Amortization expense was $12,380 in 2004 and is expected to be
$49,518 in 2005 through 2008 and $37,138 in 2009.
26
CORE MOLDING TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. FOREIGN OPERATIONS
In conjunction with the Company's acquisition of 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. Essentially all sales of the
Mexican operation are made to United States customers in United States dollars,
which totaled $20,153,000 in 2004, $18,322,000 in 2003 and $20,468,000 in 2002.
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 30% of sales in 2004, 32% of sales in 2003 and 39% of sales in
2002. The Company owns long-lived assets that are geographically located at the
Mexican operation, which total $466,000 at December 31, 2004. The Company's
manufacturing operation in Mexico is subject to various political, economic, and
other risks and uncertainties 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.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31:
2004 2003
------------ ------------
Land and land improvements $ 2,296,788 $ 2,138,329
Buildings 17,574,859 17,574,848
Machinery and equipment 24,321,268 22,780,490
Tools, dies and patterns 566,912 566,814
Additions in progress 627,750 796,018
------------ ------------
Total 45,387,577 43,856,499
Less accumulated depreciation (22,657,889) (20,647,567)
------------ ------------
Property, plant and equipment - net $ 22,729,688 $ 23,208,932
============ ============
Additions in progress at December 31, 2004 and 2003 primarily relate to
the purchase and installation of equipment at the Company's operating
facilities. At December 31, 2004 and 2003, commitments for capital expenditures
in progress were $132,000 and $376,000, respectively.
27
CORE MOLDING TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. DEBT AND LEASES
Long-term debt consists of the following at December 31:
2004 2003
------------ ------------
Note Payable to bank, interest at a variable rate with monthly
payments of interest and principal over a seven year period,
collateralized by a security interest in all the Company's
assets $ 7,821,425 9,000,000
Note Payable due to International, interest at 8%, due on
December 31, 2004 - 200,000
Industrial Revenue Bond, interest adjustable weekly (2004
average 1.47%; 2003 average 1.30%), payable quarterly,
principal due in variable quarterly installments through April,
2013, secured by a bank letter of credit with a balance of
$5,444,000 as of December 31, 2004 5,285,000 5,705,000
------------ ------------
Total 13,106,425 14,905,000
Less current portion (1,735,714) (1,905,714)
------------ ------------
Long-term debt $ 11,370,711 $ 12,999,286
============ ============
NOTE PAYABLE - BANK
On December 30, 2003, the Company borrowed $9,000,000 in the form of a
note payable collateralized by the Company's assets. The note payable bears
interest at a variable rate of LIBOR plus 200 basis points or the prime rate and
this rate was 4.28% at December 31, 2004.
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 $5,444,000 as of December 31, 2004. 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 2010, and the Company intends to
extend the letter of credit each year as required by the IRB.
NOTE PAYABLE - INTERNATIONAL
In 2003 the Company paid the note payable due International in two
payments. The first payment in the amount of $1,861,000 occurred in the first
quarter of 2003, and a second payment of $17,859,000 was made on December 30,
2003. For the second payment, the Company borrowed $9,000,000 in the form of a
note payable from its primary bank and used its cash reserves. The remaining
balance of the International note of $200,000 was replaced by a new, 8% note due
December 31, 2004. At December 31, 2004, this note was recorded as being
forgiven due to the performance objectives being achieved and the amount was
recorded in Paid In Capital because International is a significant shareholder
of the Company (see Note 12).
28
CORE MOLDING TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Annual maturities of long-term debt are as follows:
2005 $ 1,736,000
2006 1,776,000
2007 1,816,000
2008 1,866,000
2009 1,906,000
Thereafter 4,006,000
------------
Total $ 13,106,000
============
LINE OF CREDIT
At December 31, 2004, the Company had available a $7,500,000 variable rate
bank revolving line of credit scheduled to mature on April 30, 2007. The line of
credit bears interest at LIBOR plus two percent or at the prime rate. The line
of credit is collateralized by all the Company's assets. There was no
outstanding balance on the bank revolving line of credit at December 31, 2004
and 2003.
INTEREST RATE SWAPS
In conjunction with its variable rate Industrial Revenue Bond, the Company
entered into an interest rate swap agreement, which is 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. The swap term
and notional amount matches the payment schedule on the IRB with final maturity
in April 2013. The difference paid or received varies as short-term interest
rates change and is accrued and recognized as an adjustment to interest expense.
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
such non-performance is unlikely to occur given the financial resources of the
counterparty. The effectiveness of the swap is assessed at each financial
reporting date by comparing the commercial paper rate of the swap to the
benchmark rate underlying the variable rate of the Industrial Revenue Bond.
Effective January 1, 2004, the Company entered into an interest rate swap
agreement, which is designated as a cash flow hedge of the bank note payable.
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 note payable with final maturity in January
2011. 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 such non-performance is unlikely to occur given the financial resources
of the counterparty. Interest expense includes $409,000 in 2004, $235,000 in
2003 and $225,000 in 2002 of settlements related to the swaps.
BANK COVENANTS
The Company is subject to formal debt covenants related to minimum fixed
charge coverage and total funded obligations debt ratios. As of December 31,
2004, the Company was in compliance with these covenants.
29
CORE MOLDING TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LEASES
The Company leases a significant portion of its manufacturing equipment
and a warehouse facility under operating lease agreements.
In October 2001, in conjunction with the Airshield Asset Acquisition, the
Company's Mexican subsidiary entered into a 10-year lease agreement for a
manufacturing facility in Matamoros, Mexico. The Company has an option to
purchase the facility at any time during the first seven years. The Company may
cancel the lease upon giving six months notice to the lessor.
Total rental expense was $4,035,000, $4,388,000 and $4,341,000 for 2004,
2003 and 2002.
The future minimum lease payments under non-cancelable operating leases
that have lease terms in excess of one year are as follows:
2005 $ 3,557,000
2006 3,265,000
2007 2,859,000
2008 927,000
2009 475,000
Thereafter 212,000
------------
Total minimum lease payments $ 11,295,000
============
8. EQUITY
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 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
The Company's Certificate of Incorporation contains a provision (the
"Prohibited Transfer Provision") designed to help assure the continued
availability of the Company's substantial net operating loss and capital loss
carryforwards (see Note 10) 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.
30
CORE MOLDING TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. INCENTIVE STOCK PLANS
STOCK OPTIONS
The Company has a Long Term Equity Incentive Plan (the "Plan"), as
originally approved by the shareholders in May 1997, and as amended in May 2000
to increase the number of shares authorized for issuance, that allows for grants
to directors and key employees of non-qualified stock options, incentive stock
options, director options, stock appreciation rights, restricted stock,
performance shares, performance units and other incentive awards up to an
aggregate of 3.0 million awards, each representing a right to buy a share of the
Company's common stock. The Plan expires on the earlier of December 31, 2006, or
the date the maximum number of available awards under the plan have been
granted.
During 2004, 2003 and 2002, the Company granted stock options under
the plan. The options have vesting schedules of five or nine and one-half years
from the date of grant, are not exercisable after ten years from the date of
grant, and were granted at prices which equaled or exceeded the fair market
value of the Company's common stock at the date of grant.
The weighted average fair value of options granted during 2004, 2003
and 2002 was $1.56, $2.12 and $1.17, respectively. The fair value of the options
granted were estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: risk free interest rate of
4.13% for 2004, 4.14% for 2003 and 3.97% for 2002, no expected dividend yield,
expected lives of 8 to 10 years and expected volatility of 37%, 56% and 73% for
2004, 2003 and 2002, respectively.
On August 4, 2003, of the 1,171,500 stock options outstanding,
978,000 options were tendered for cancellation. The Company issued 594,700
options under the Plan on February 9, 2004, at $3.21 per share. On the same
date, the Company issued 261,250 options that were not covered under the Plan at
$3.21to its Directors.
The following summarizes all stock option activity for the years
ended December 31:
2004 2003 2002
---- ---- ----
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- -------- ---------- --------
Outstanding - beginning of year 214,000 $ 2.93 1,209,000 $ 3.07 1,149,000 $ 3.10
Granted 1,043,550 3.13 35,000 3.33 84,500 2.75
Forfeited (53,650) 2.93 (1,030,000) 3.11 (24,000) 3.26
--------- ------ --------- ------ ---------- ------
Outstanding - end of year 1,203,900 $ 3.12 214,000 $ 2.93 1,209,000 $ 3.07
========= ====== ========= ====== ========== ======
Exercisable at December 31 615,006 $ 3.16 93,100 $ 3.17 622,050 $ 3.17
========= ====== ========= ====== ========== ======
Options available for grant 2,044,750 2,778,400 1,783,400
========= ========= =========
31
CORE MOLDING TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table summarizes information about stock options outstanding and
exercisable as of December 31, 2004:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
RANGE OF NUMBER OF AVERAGE CONTRACTUAL LIFE NUMBER OF AVERAGE
EXERCISE PRICES OPTIONS EXERCISE PRICE IN YEARS OPTIONS EXERCISE PRICE
- --------------- --------- -------------- ---------------- --------- ---- -----------
$ 2.75 311,000 $ 2.75 8.0 87,000 $ 2.75
$ 3.21 837,900 3.21 9.1 501,006 3.21
$ 3.33 to $3.75 55,000 3.41 6.9 27,000 3.49
--------- ------- ------- ------
1,203,900 $ 3.12 615,006 $ 3.16
========= ======= ======= ======
PHANTOM STOCK AGREEMENT
In 2000, the Company issued 150,000 phantom stock units to an officer. For
each unit, the officer is entitled to a cash payment of an amount equal to the
excess of the market value on the date of the exercise over $2.75. The units
vested on December 31, 2004 and expire one year later, assuming continued
employment of the officer. Compensation expense (income) was ($23,000) in 2004,
$26,000 in 2003 and $0 in 2002.
10. INCOME TAXES
Components of the provision (credit) for income taxes are as follows:
2004 2003 2002
----------- --------- -----------
Current:
Federal - US $ 107,000 $ 72,000 $ (217,000)
Federal - Foreign 137,000 224,000 301,000
State and local 358,000 106,000 (29,000)
----------- --------- -----------
602,000 402,000 55,000
Deferred:
Federal 1,453,000 548,000 491,000
State and local (59,000) 23,000 523,000
Decrease in valuation allowance
for net operating loss carryforward (1,425,000) - -
----------- --------- -----------
(31,000) 571,000 1,014,000
----------- --------- -----------
Provision for income taxes $ 571,000 $ 973,000 $ 1,069,000
=========== ========= ===========
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
year ended December 31 is as follows:
2004 2003 2002
------------ ---------- -----------
Provision at federal statutory rate - US $ 1,940,000 $ 897,000 $ 980,000
Effect of foreign taxes (62,000) (14,000) 32,000
State and local tax expense, net of federal benefit 197,000 64,000 71,000
Other (79,000) 26,000 (14,000)
Decrease in valuation allowance for net operating
loss carryforward (1,425,000) - -
------------ ---------- -----------
Provision for income taxes $ 571,000 $ 973,000 $ 1,069,000
============ ========== ===========
32
CORE MOLDING TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Deferred tax assets (liabilities) consist of the following at December 31:
2004 2003
------------ ------------
Current Asset:
Accrued liabilities $ 1,198,000 $ 982,000
Other, net 694,000 400,000
------------ ------------
Total current asset 1,892,000 1,382,000
Non-current asset(liability):
Property, plant and equipment 2,582,000 2,903,000
Net operating loss carryforwards 3,313,000 5,172,000
Postretirement benefits 3,360,000 2,869,000
Interest rate swap 160,000 207,000
Other, net (53,000) 162,000
------------ ------------
Total non-current asset 9,362,000 11,313,000
------------ ------------
Total deferred tax asset 11,254,000 12,695,000
Less valuation allowance - (1,425,000)
------------ ------------
Total deferred tax asset - net $ 11,254,000 $ 11,270,000
============ ============
At December 31, 2004, the Company had approximately $9.7 million of NOL
carryforwards available to offset future taxable income. A valuation allowance
was provided for approximately $4,200,000 of NOL carryforwards, which were
estimated to expire before they could be utilized. In the fourth quarter of
2004, the Company eliminated the valuation allowance because it is more likely
than not that the Company will realize these benefits.
The Company's NOL carryforwards expire as follows:
2008 $3,282,000
2009 3,614,000
2010 638,000
2011 362,000
2012 1,847,000
----------
Total $9,743,000
==========
At December 31, 2004, a provision has not been made for U.S. taxes on
accumulated undistributed earnings of approximately $1,448,000 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.
33
CORE MOLDING TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. POSTRETIREMENT BENEFITS
The Company provides postretirement benefits to substantially all of its
United States employees. Costs associated with postretirement benefits include
pension expense, postretirement health care and life insurance expense and
expense related to contributions to two 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 from International, certain
of the Company's employees were participants in various International sponsored
pension and postretirement plans. The International pension plan for
non-represented employees was non-contributory and both benefits and years of
service were frozen as of the date of the acquisition of Columbus Plastics. In
connection with the acquisition, International retained responsibility for the
vested benefits as of December 31, 1996, and the Company agreed to reimburse
International for early retirement subsidies for certain employees. The
accumulated benefit obligation, which equals the projected benefit obligation
and net liability, is $248,000 at December 31, 2004 and $233,000 at December 31,
2003.
The postretirement 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,
International and the participants in the form of premiums, co-payments and
deductibles. The Company and International 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 funded status of the Company's postretirement health and life
insurance benefits plan as of December 31, 2004 and 2003 and reconciliation with
the amounts recognized in the consolidated balance sheets are provided below:
POST RETIREMENT BENEFITS
---------------------------------------------
2004 2003 2002
------------- ------------ ------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 9,763,000 $ 8,852,000 $ 6,787,000
Service cost 642,000 451,000 434,000
Interest cost 602,000 494,000 491,000
Unrecognized loss 459,000 99,000 1,196,000
Benefits paid (214,000) (133,000) (56,000)
------------- ------------ ------------
BENEFIT OBLIGATION AT END OF YEAR $ 11,252,000 $ 9,763,000 $ 8,852,000
------------- ------------ ------------
Unfunded status $ (11,252,000) $ (9,763,000) $ (8,852,000)
Unrecognized net loss 3,461,000 3,158,000 3,134,000
------------- ------------ ------------
Net liability $ (7,791,000) $ (6,605,000) $ (5,718,000)
============= ============ ============
PLAN ASSETS -- -- --
============= ============ ============
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31:
Discount rate 6.00% 6.50% 7.25%
34
CORE MOLDING TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The components of expense for all of the Company's postretirement benefits plans
are as follows:
2004 2003 2002
----------- ----------- -----------
Pension Expense:
Interest cost $ 15,000 $ 15,000 $ 15,000
Defined contribution plan
contributions 280,000 282,000 231,000
Multi-employer plan
contributions 381,000 324,000 352,000
----------- ----------- -----------
Total Pension Expense 676,000 621,000 598,000
----------- ----------- -----------
Health and Life Insurance:
Service cost 642,000 451,000 434,000
Interest cost 602,000 494,000 491,000
Amortization of net loss 163,000 75,000 83,000
----------- ----------- -----------
Net periodic benefit cost 1,407,000 1,020,000 1,008,000
----------- ----------- -----------
Total postretirement benefits
expense $ 2,083,000 $ 1,641,000 $ 1,606,000
=========== =========== ===========
The weighted average rate of increase in the per capita cost of covered health
care benefits is projected to be 9.00%. The rate is projected to decrease
gradually to 5% by the year 2009 and remain at that level thereafter. The
comparable assumptions for the prior year were 9.65% and 5%.
In May 2004, the Financial Accounting Standards Board ("FASB") staff
issued FASB Staff Position 106-2, "Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and Modernization Act of
2003" (the "Act"). Core Molding Technologies adopted the provisions of the Act
in the third quarter of 2004. The adoption of the provisions of the Act
increased net income for the year ended December 31, 2004 by $258,000.
The effect of changing the health care cost trend rate by one-percentage point
for each future year is as follows:
1- PERCENTAGE 1-PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
Effect on total of service and interest cost components $ 280,000 $ (218,000)
Effect on postretirement benefit obligation 2,408,000 (1,902,000)
The estimated future benefit payments of the health care plan are:
Fiscal 2005 $ 32,000
Fiscal 2006 58,000
Fiscal 2007 85,000
Fiscal 2008 118,000
Fiscal 2009 187,000
Fiscal 2010 - 2014 2,251,000
12. RELATED PARTY TRANSACTIONS
In connection with the acquisition of Columbus Plastics, the Company and
International entered into a Supply Agreement. Under the terms of the Supply
Agreement, International agreed to purchase from the Company, and the Company
agreed to sell to International all of International'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
May 2003, the Company entered into a Comprehensive Supply Agreement, which was
effective as of November 1, 2002. Under this Comprehensive Supply Agreement, the
Company became the primary supplier of International'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, 2006.
35
CORE MOLDING TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
12. RELATED PARTY TRANSACTIONS (Continued)
International owns 43.6% of the Company's outstanding common stock. Sales
to International were $60,167,000 in 2004, $51,205,000 in 2003 and $45,823,000
in 2002, of which $10,705,000 and $5,617,000 had not been received as of
December 31, 2004 and 2003 and were included in accounts receivable. Receivables
as of December 31, 2004 and 2003 also include $2,303,000 and $18,000,
respectively, for tooling costs owed by International. The Company expensed $0
in 2004, $1,487,000 in 2003 and $1,616,000 in 2002, for interest expense on its
note payable to International. During 2003, the Company repaid $19,720,150 of
the International note and the balance of $200,000 was replaced by a note due
December 31, 2004. At December 31, 2004 this note was recorded as being forgiven
by International due to the Company meeting certain earning thresholds. The
amount was recorded as Paid In Capital (see Note 7).
13. LABOR CONCENTRATION
As of December 31, 2004, the Company employed a total of 1,094 employees,
which consists of 502 employees in its U.S. operations and 592 employees in its
Mexican operations. Of these 1,094 employees, 311 are covered by a collective
bargaining agreement with the International Association of Machinists and
Aerospace Workers ("IAM"), which extends to August 6, 2007, and 512 are covered
by a collective bargaining agreement with Sindicato de Jorneleros y Obreros,
which extends to January 16, 2007.
14. 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 is likely to have a
material adverse effect on the Company's consolidated financial position or
results of operations.
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of
operations for the years ended December 31, 2004 and 2003.
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER TOTAL YEAR
----------- ----------- ------------ ------------ ------------
2004:
Product sales $24,106,917 $26,288,365 $24,923,582 $ 28,414,660 $103,733,524
Tooling sales 134,200 318,599 1,004,072 6,654,881 8,111,752
----------- ----------- ------------ ------------ ------------
Net sales 24,241,117 26,606,964 25,927,654 35,069,541 111,845,276
Gross margin 3,980,836 5,075,555 3,365,634 4,887,114 17,309,139
Income before interest and taxes 1,128,031 2,327,800 935,924 2,179,894 6,571,649
Net income 544,633 1,309,969 477,699 2,802,349 5,134,650
Net income per common share:
Basic $ 0.06 $ 0.13 $ 0.05 $ 0.29 $ 0.53
Diluted $ 0.05 $ 0.13 $ 0.05 $ 0.29 $ 0.52
2003:
Product sales $19,062,891 $20,975,060 $19,290,263 $ 21,967,273 $ 81,295,487
Tooling sales 10,481,536 164,735 44,542 797,034 11,487,847
----------- ----------- ------------ ------------ ------------
Net sales 29,544,427 21,139,795 19,334,805 22,764,307 $ 92,783,334
Gross margin 3,804,022 4,400,290 2,704,692 2,988,903 13,897,907
Income before interest and taxes 1,321,777 2,016,937 394,692 669,761 4,403,167
Net income (loss) 515,439 969,292 (5,491) 186,019 1,665,259
Net income per common share:
Basic $ 0.05 $ 0.10 ($ 0.00) $ 0.02 $ 0.17
Diluted $ 0.05 $ 0.10 ($ 0.00) $ 0.02 $ 0.17
During the fourth quarter of 2004, the Company reversed a deferred income tax
valuation allowance of $1,425,000.
36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable
ITEM 9A. CONTROLS AND PROCEDURES
As required by Rule 13a-15(b) of the Exchange Act, 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. The evaluation examined those disclosure controls and
procedures as of December 31, 2004, the end of the period covered by this
report. Based upon the evaluation, the Company's management, including its Chief
Executive Officer and its Chief Financial Officer, concluded that, as of
December 31, 2004, the Company's disclosure controls and procedures were
effective to ensure that information required to be disclosed in the Company's
reports filed or submitted under the Exchange Act was accumulated and
communicated to the Company's management, including its Chief Executive Officer
and its Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
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 12, 2005, 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 11. EXECUTIVE COMPENSATION.
The information required by this Part III, Item 11 is incorporated by
reference from The Company's definitive proxy statement for its annual meeting
of stockholders to be held on or about May 12, 2005, 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 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
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 12, 2005, 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. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
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 12, 2005, 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. 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 12, 2005, 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.
37
PART IV
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 Form 10-K:
Independent Auditors' Report
Consolidated Statements of Operations for the Years Ended
December 31, 2004, 2003 and 2002
Consolidated Balance Sheets as of December 31, 2004 and 2003
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 2004, 2003 and 2002
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2004, 2003 and 2002
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, 2004, 2003 and 2002
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.
38
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.
CORE MOLDING TECHNOLOGIES, INC.
By /s/ James L. Simonton
----------------------------------------
James L. Simonton
President and Chief Executive Officer
Date: March 30, 2005
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/ James L. Simonton President, Chief Executive Officer March 30, 2005
- ------------------------- and Director
James L. Simonton
/s/ Herman F. Dick, Jr. Treasurer and March 30, 2005
- ------------------------- Chief Financial Officer
Herman F. Dick, Jr.
* Director March 30, 2005
- -------------------------
Thomas R. Cellitti
* Director March 30, 2005
- -------------------------
James F. Crowley
* Director March 30, 2005
- -------------------------
Ralph O. Hellmold
* Director March 30, 2005
- -------------------------
Thomas M. Hough
* Director March 30, 2005
- -------------------------
Malcolm M. Prine
* Director March 30, 2005
- -------------------------
John P. Wright
*By James L. Simonton Attorney-In-Fact March 30, 2005
---------------------
James L. Simonton
39
CORE MOLDING TECHNOLOGIES, INC. AND SUBSIDIARIES
SCHEDULE II
Consolidated valuation and qualifying accounts and reserves for the years ended
December 31, 2004, 2003 and 2002.
Reserves deducted from asset to which it applies - allowance for doubtful
accounts.
Additions
----------------------
Balance at Charged to Charged to
Beginning Costs & Other Deductions Balance At
of Year Expenses Accounts (A) End of Year
---------- ---------- ---------- ---------- -----------
Year Ended December 31, 2004 $ 379,000 $ 83,000 $ 227,000 $ 235,000
Year Ended December 31, 2003 $ 543,000 $ 85,000 $ 249,000 $ 379,000
Year Ended December 31, 2002 $ 715,000 $ 174,000 $ 346,000 $ 543,000
(A) Amount represents uncollectible accounts written off.
Reserves deducted from asset to which it applies - deferred income tax valuation
allowance.
Additions
----------------------
Balance at Charged to Charged to
Beginning Costs & Other Balance At
of Year Expenses Accounts Deductions End of Year
----------- ---------- ---------- ----------- -----------
Year Ended December 31, 2004 $ 1,425,000 ($1,425,000) -
Year Ended December 31, 2003 $ 1,425,000 $ 1,425,000
Year Ended December 31, 2002 $ 1,425,000 $ 1,425,000
40
INDEX TO EXHIBITS
Exhibit No. Description Location
- ----------- ------------------------------------ --------------------------
2(a)(1) Asset Purchase Agreement Incorporated by reference
dated as of September 12, 1996, to Exhibit 2-A to
as amended October 31, 1996, Registration Statement
between Navistar and RYMAC(1) on Form S-4 (Registration
No. 333-15809)
2(a)(2) Second Amendment to Asset Purchase Incorporated by reference
Agreement dated December 16, 1996(1) to Exhibit 2(a)(2) to
Annual Report on Form 10-K
for the year ended December
31, 2001
2(b)(1) Agreement and Plan of Merger Incorporated by reference
dated as of November 1, 1996, to Exhibit 2-B to
between Core Molding and Registration Statement
RYMAC on Form S-4 (Registration
No. 333-15809)
2(b)(2) First Amendment to Agreement and Incorporated by reference
Plan of Merger dated as of to Exhibit 2(b)(2) tp
December 27, 1996 between Annual Report on Form 10-K
Core Molding and RYMAC for the year Ended December
31, 2002
2(c)(1) Asset Purchase Agreement dated as Incorporated by
of October 10, 2001, between reference to Exhibit 1 to
Core Molding Technologies, Inc. and Form 8K filed
Airshield Corporation October 31, 2001
3(a)(1) Certificate of Incorporation of Incorporated by reference
Core Molding Technologies, Inc. to Exhibit 4(a) to
as filed with the Secretary of State Registration Statement
of Delaware on October 8, 1996 on Form S-8, (Registration
No. 333-29203)
3(a)(2) Certificate of Amendment of Incorporated by reference
Certificate of Incorporation to Exhibit 4(b) to
of Core Molding Technologies, Inc. Registration Statement
as filed with the Secretary of State on Form S-8
of Delaware on November 6, 1996 (Registration
No. 333-29203)
41
Exhibit No. Description Location
- ----------- -------------------------------------------- ----------------------------
3(a)(3) Certificate of Incorporation of Core Incorporated by reference to
Molding Technologies Inc., reflecting Exhibit 4(c) to Registration
amendments through November 6, Statement on Form S-8
1996 [for purposes of compliance (Registration No. 333-29203)
with Securities and Exchange
Commission filing requirements only]
3(a)(4) Certificate of Amendment of Certificate Incorporated by reference to
of Incorporation as filed with the Secretary Exhibit 3(a)(4) to Quarterly
of State of Delaware on August 28, 2002 Report on Form 10-Q for the
quarter ended September 30,
2002
3(b) By-Laws of Core Molding Incorporated by reference to
Technologies, Inc. Exhibit 3-C to Registration
Statement on Form S-4
(Registration No. 333-15809)
4(a)(1) Certificate of Incorporation of Incorporated by reference to
Core Molding Technologies, Inc. Exhibit 4(a) to
as filed with the Secretary of State Registration Statement on
of Delaware on October 8, 1996 Form S-8 (Registration
No. 333-29203)
4(a)(2) Certificate of Amendment of Incorporated by reference to
Certificate of Incorporation Exhibit 4(b) to Registration
of Core Molding Technologies, Inc. Statement on Form S-8
as filed with the Secretary of State (Registration No. 333-29203)
of Delaware on November 6, 1996
4(a)(3) Certificate of Incorporation of Core Incorporated by reference to
Molding Technologies, Inc., reflecting Exhibit 4(c) to Registration
amendments through November 6, Statement on Form S-8
1996 [for purposes of compliance (Registration No. 333-29203)
with Securities and Exchange
Commission filing requirements only]
4(a)(4) Certificate of Amendment of Certificate Incorporated by reference to
of Incorporation as filed with the Secretary Exhibit 3(a)(4) to Quarterly
of State of Delaware on August 28, 2002 Report on Form 10-Q for the
quarter ended September
30, 2002
42
Exhibit No. Description Location
- ----------- ----------------------------------------- -----------------------------
4(b) By-Laws of Core Molding Incorporated by reference to
Technologies, Inc. Exhibit 3-C to Registration
Statement on Form S-4
(Registration No. 333-15809)
10(a)(1) Core Molding Technologies, Inc. Incorporated by reference to
Secured Promissory Note, dated Exhibit 10(a)(6) to Annual
December 29, 2003, to International Report on Form 10-K for the
Truck & Engine Corporation year ended December 31, 2003
10(a)(2) Amendment No. 1 to Unsecured Incorporated by reference to
Promissory Note, dated January 30, 2004 Exhibit 10(a)(7) to Annual
to International Truck and Engine Corp. Report on Form 10-K for the
year ended December 31, 2003
10(b) Comprehensive Supply Agreement, Incorporated by reference to
dated November 1, 2002, by and Exhibit 10(b) to Annual
between Core Molding Technologies, Inc. Report on Form 10-K for the
and International Truck and Engine Corp. year ended December 31, 2003
10(d) Registration Rights Agreement, dated Incorporated by reference to
December 31, 1996, by and between Exhibit 10(d) to Annual
Navistar International Transportation Report on Form 10-K for the
Corp. and various other persons who year ended December 31, 2001
become parties pursuant to the agreement
10(e) Loan Agreement, dated December 3, Incorporated by reference
1997, by and between Core Molding to Exhibit 10(e) to Annual
Technologies, Inc. and Key Bank National Report on Form 10-K for
Association the year ended December 31,
2002
10(e)(1) Amendment, dated March 29, 2001, to the Incorporated by reference
Loan Agreement dated December 3, 1997 to Exhibit 10(e)(1) to Annual
By and between Core Molding Technologies, Report on Form 10-K for the
Inc. and Key Bank National Association year ended December 31, 2002
10(e)(2) Amendment, dated December 12, 2002, to Incorporated by reference to
the Loan Agreement dated December 3, 1997 Exhibit 10(e)(2) to Annual
by and between Core Molding Technologies, Report on Form 10-K for the
Inc. and Key Bank National Association year ended December 31, 2002
10(e)(3) Loan Agreement, date December 30, 2003, Incorporated by reference to
by and between Core Molding Technologies, Exhibit 10(e)(3) to Annual
Inc. and Key Bank National Association(2) Report on Form 10-K for the
year ended December 31, 2003
43
Exhibit No. Description Location
- ----------- ----------------------------------------------- -------------------------------
10(f) Master Equipment Lease Agreement(3) Incorporated by reference to
by and between KeyCorp Leasing, Exhibit 10(f) to Annual Report
a division of Key Corporate on Form 10-K for the year
Capital, Inc. and Core Molding ended December 31, 2002
Technologies, Inc.
10(f)(1) Amendment, dated March 29, 2001, to Incorporated by reference
Master Equipment Lease Agreement(3) by to Exhibit 10(f)(1) to Annual
and between KeyCorp Leasing, Report on Form 10-K for the
a division of Key Corporate year ended December 31, 2000
Capital, Inc. and Core Molding
Technologies, Inc.
10(g) Loan Agreement, dated April 1, Incorporated by reference to
1998, by and between South Carolina Exhibit 10(g) to Annual
Jobs - Economic Development Authority Report on Form 10-K for the
and Core Molding Technologies, Inc. year ended December 31, 2003
10(h) Reimbursement Agreement, dated Incorporated by reference to
April 1, 1998, by and between Core Exhibit 10(h) to Annual
Molding Technologies, Inc. and Key Bank Report on Form 10-K for the
National Association year ended December 31, 2003
10(h)(1) Amendment, dated March 29, 2001, to Incorporated by reference to
Reimbursement Agreement, dated Exhibit 10(h)(1) to Annual
April 1, 1998, by and between Core Report on Form 10-K for the
Molding Technologies, Inc. and Key Bank year ended December 31, 2000
National Association
10(i) Core Molding Technologies, Inc. Incorporated by reference to
Employee Stock Purchase Plan Exhibit 4(c) to Registration
Statement on Form S-8
(Registration No. 333-60909)
10(i)(1) 2002 Core Molding Technologies, Inc. Incorporated by reference to
Employee Stock Purchase Plan Exhibit B to Definitive Proxy
Statement dated April 15, 2002
10(j) Letter Agreement Regarding Terms and Incorporated by reference to
Conditions of Interest Rate Swap Exhibit 10(j) to Annual Report
Agreement between KeyBank National on Form 10-K for the year ended
Association and Core Molding Technologies, Inc. December 31, 2003
10(k) Long Term Equity Incentive Plan(4) Incorporated by reference to
Exhibit 4(e) to Registration
Statement on Form S-8
(Registration No. 333-29203)
44
Exhibit No. Description Location
- ----------- ----------------------------------------- -------------------------------
10(l) 1995 Stock Option Plan(4) Incorporated by reference to
Exhibit 10(l) to Annual Report
on Form 10-K for the year
ended December 31, 2001
10(m) Informal Cash Incorporated by reference to
Profit Sharing Plan(4) Exhibit 10(m) to Annual Report
On Form 10-K for the year ended
December 31, 2002
10(m)(1) Core Molding Technologies, Inc. Incorporated by reference to
Cash Profit Sharing Plan, as amended Exhibit 10.1 to Form 8-K
December 16, 2004(4) filed December 22, 2004
10(o) Compensation Agreement with Incorporated by reference
Malcolm M. Prine(4) to Exhibit 10(o) to Annual
Report on Form 10-K for
the year ended December 31,
2000
11 Computation of Net Income per Share Exhibit 11 is omitted because
the required information is
included in the Notes to
Financial Statements in Part
II, Item 8 of this Annual
Report on Form 10-K
14 Code of Business Conduct and Ethics Incorporated by reference to
Exhibit 14 to Annual Report
on Form 10-K for the year
ended December 31, 2003
23 Consent of Deloitte & Touche LLP Filed Herein
24 Powers of Attorney Filed Herein
31(a) Section 302 Certification by James L. Filed Herein
Simonton, President and Chief Executive
Officer
31(b) Section 302 Certification by Herman F. Filed Herein
Dick, Jr., Treasurer and Chief Financial
Officer
32(a) Certification of James L. Simonton, Filed Herein
Chief Executive Officer of Core Molding
Technologies, Inc., dated March 30, 2004,
pursuant to 18 U.S.C. Section 1350
45
Exhibit No. Description Location
- ----------- ----------------------------------------- ------------
32(b) Certification of Herman F. Dick, Jr., Filed Herein
Chief Financial Officer of Core Molding
Technologies, Inc., dated March 30, 2004,
pursuant to 18 U.S.C. Section 1350
(1) 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.
(2) The Loan Agreement filed with this Annual Report on Form 10-K, omits the
exhibits (including Revolving Credit Note, Term Note, Security Agreement, Ohio
Mortgage, South Carolina Mortgage, and Guaranty) and schedules. Core Molding
Technologies, Inc. will provide any omitted exhibit to the SEC upon request.
(3) The Master Equipment Lease, incorporated by reference in the Exhibits to
this Annual Report on Form 10-K, omits certain schedules (including, addendum to
the schedules) which separately identify equipment subject to the Master
Equipment Lease and certain additional terms applicable to the lease of such
equipment. New schedules may be added under the terms of the Master Equipment
Lease from time to time and existing schedules may change. Core Molding
Technologies, Inc. will provide any omitted schedule to the SEC upon request.
(4) Indicates management contracts or compensatory plans that are required to be
filed as an exhibit to this Annual Report on Form 10-K.
46