Form 10-Q
Table of Contents

 
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2010
OR
     
o   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
incorporation or organization)
  (I.R.S. Employer Identification No.)
     
800 Manor Park Drive
Columbus, Ohio
  43228-0183
 
(Address of principal executive office)   (Zip Code)
Registrant’s telephone number, including area code (614) 870-5000
N/A
 
Former name, former address and former fiscal year, if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ     NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o     NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer,” and “smaller reporting company,” in Rule 12b-2 of the Exchange Act (Check one).
Large accelerated filer o Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company þ
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.
Yes o     NO þ
As of August 12, 2010, the latest practicable date, 7,076,676 shares of the registrant’s common stock were issued and outstanding.
 
 

 

 


 

Table of Contents
         
       
 
       
Item 1. Financial Statements
       
 
       
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 Exhibit 31(a)
 Exhibit 31(b)
 Exhibit 32(a)
 Exhibit 32(b)

 

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Table of Contents

Part 1 — Financial Information
Core Molding Technologies, Inc. and Subsidiaries
Unaudited Consolidated Balance Sheets
                 
    June 30,     December 31,  
    2010     2009  
Assets
               
Current Assets:
               
Cash
  $ 3,077,211     $ 4,141,838  
Accounts receivable (less allowance for doubtful accounts:
               
June 30, 2010 — $116,000; December 31, 2009 — $113,000)
    14,143,162       11,936,335  
Inventories:
               
Finished goods
    2,414,473       863,166  
Work in process
    1,177,630       1,253,975  
Stores
    4,524,180       4,896,221  
 
           
Total inventories
    8,116,283       7,013,362  
 
               
Deferred tax asset-current portion
    1,195,831       1,195,831  
Foreign sales tax receivable
    737,772       652,155  
Income tax receivable
    115,246       1,021,093  
Prepaid expenses and other current assets
    1,312,692       562,176  
 
           
Total current assets
    28,698,197       26,522,790  
 
               
Property, plant and equipment
    83,203,580       81,670,080  
Accumulated depreciation
    (38,400,792 )     (36,726,836 )
 
           
Property, plant and equipment — net
    44,802,788       44,943,244  
 
               
Deferred tax asset
    5,523,247       6,570,802  
Goodwill
    1,097,433       1,097,433  
Other assets
    30,106       42,029  
 
           
Total
  $ 80,151,771     $ 79,176,298  
 
           
 
               
Liabilities and Stockholders’ Equity
               
Liabilities:
               
Current liabilities
               
Current portion of long-term debt
  $ 5,464,278     $ 3,675,005  
Current portion of postretirement benefits liability
    673,000       667,000  
Accounts payable
    5,664,340       4,805,468  
Tooling in progress
    907,314       484,786  
Accrued liabilities:
               
Compensation and related benefits
    2,423,555       2,400,587  
Interest payable
    76,607       102,069  
Other
    954,986       800,912  
 
           
Total current liabilities
    16,164,080       12,935,827  
 
               
Long-term debt
    14,113,568       17,732,842  
Interest rate swap
    420,153       198,809  
Postretirement benefits liability
    18,319,051       18,076,696  
 
               
Commitments and Contingencies
               
 
               
Stockholders’ Equity:
               
Preferred stock — $0.01 par value, authorized shares — 10,000,000; Outstanding shares: June 30, 2010 and December 31, 2009 — 0
           
Common stock — $0.01 par value, authorized shares — 20,000,000; Outstanding shares: 6,829,300 at June 30, 2010 and 6,799,641 at December 31, 2009
    68,293       67,996  
Paid-in capital
    23,558,582       23,336,197  
Accumulated other comprehensive loss, net of income tax benefit
    (1,430,145 )     (1,805,897 )
Treasury stock
    (26,179,054 )     (26,179,054 )
Retained earnings
    35,117,243       34,812,882  
 
           
Total stockholders’ equity
    31,134,919       30,232,124  
 
           
Total
  $ 80,151,771     $ 79,176,298  
 
           
See notes to unaudited consolidated financial statements.

 

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Core Molding Technologies, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2010     2009     2010     2009  
Net sales:
                               
Products
  $ 21,473,293     $ 16,643,805     $ 41,169,225     $ 34,474,085  
Tooling
    2,002,499       656,303       2,748,607       1,210,140  
 
                       
Total sales
    23,475,792       17,300,108       43,917,832       35,684,225  
 
                               
Total cost of sales
    20,056,987       16,315,841       36,415,103       33,126,619  
 
                       
 
                               
Gross margin
    3,418,805       984,267       7,502,729       2,557,606  
 
                               
Total selling, general and administrative expense
    2,293,334       2,255,738       4,619,270       4,755,741  
 
                       
 
                               
Income (loss) before interest and taxes
    1,125,471       (1,271,471 )     2,883,459       (2,198,135 )
 
                               
Interest expense
    (457,290 )     (30,241 )     (877,473 )     (140,395 )
 
                       
 
                               
Income (loss) before income taxes
    668,181       (1,301,712 )     2,005,986       (2,338,530 )
 
                               
Income tax expense (benefit)
    226,878       (456,902 )     1,701,625       (856,226 )
 
                       
 
                               
Net income (loss)
  $ 441,303     $ (844,810 )   $ 304,361     $ (1,482,304 )
 
                       
 
                               
Net income (loss) per common share:
                               
Basic
  $ 0.06     $ (0.12 )   $ 0.04     $ (0.22 )
 
                       
Diluted
  $ 0.06     $ (0.12 )   $ 0.04     $ (0.22 )
 
                       
 
                               
Weighted average shares outstanding:
                               
Basic
    6,817,365       6,784,442       6,808,542       6,769,442  
 
                       
Diluted
    7,078,959       6,784,442       7,132,176       6,769,442  
 
                       
See notes to unaudited consolidated financial statements.

 

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Core Molding Technologies, Inc. and Subsidiaries
Consolidated Statement of Stockholders’ Equity
(Unaudited)
                                                         
                                    Accumulated                
    Common Stock                     Other             Total  
    Outstanding     Paid-In     Retained     Comprehensive     Treasury     Stockholders’  
    Shares     Amount     Capital     Earnings     Income (Loss)     Stock     Equity  
Balance at January 1, 2010
    6,799,641     $ 67,996     $ 23,336,197     $ 34,812,882     $ (1,805,897 )   $ (26,179,054 )   $ 30,232,124  
 
                                                       
Net income
                      304,361                   304,361  
 
                                                       
Curtailment of post retirement benefit
                            298,000             298,000  
Amortization of unrecognized net loss on post retirement benefit, net of tax expense of $19,607
                            38,059             38,059  
 
                                                       
Hedge accounting effect of the interest rate swaps, net of deferred income tax expense of $20,448
                            39,693             39,693  
 
                                                     
 
                                                       
Comprehensive income
                                                    680,113  
 
                                                       
Common stock issued
    12,000       120       33,800                         33,920  
 
                                                       
Restricted stock issued
    17,659       177       95,413                         95,590  
 
                                                       
Share-based compensation
                93,172                         93,172  
 
                                         
Balance at June 30, 2010
    6,829,300     $ 68,293     $ 23,558,582     $ 35,117,243     $ (1,430,145 )   $ (26,179,054 )   $ 31,134,919  
 
                                         
See notes to unaudited consolidated financial statements.

 

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Core Molding Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
                 
    Six Months Ended  
    June 30,  
    2010     2009  
Cash flows from operating activities:
               
 
               
Net income (loss)
  $ 304,361     $ (1,482,304 )
 
               
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
 
               
Depreciation and amortization
    1,966,716       1,849,330  
Deferred income taxes
    1,021,501       (44,095 )
Ineffectiveness of swaps
    267,485       (252,461 )
Share-based compensation
    188,762       178,194  
Loss on disposal of assets
    14,277       49,405  
Gain on translation of foreign currency financial statements
    (50,334 )     (71,217 )
Change in operating assets and liabilities:
               
Accounts receivable
    (2,206,827 )     3,197,613  
Inventories
    (1,102,922 )     2,148,500  
Prepaid and other assets
    (422,744 )     (493,832 )
Accounts payable
    867,609       (1,741,123 )
Accrued and other liabilities
    1,021,037       (1,354,238 )
Postretirement benefits liability
    604,021       476,488  
 
           
Net cash provided by operating activities
    2,472,942       2,460,260  
 
           
 
               
Cash flows from investing activities:
               
 
               
Purchase of property, plant and equipment
    (1,741,488 )     (8,703,156 )
 
           
Net cash used in investing activities
    (1,741,488 )     (8,703,156 )
 
           
 
               
Cash flows from financing activities:
               
 
               
Financing costs for new credit agreement
          (224,321 )
Gross repayments on line of credit
          (27,109,191 )
Gross borrowings on line of credit
          26,788,460  
Payments of principal on Capex loan
    (857,143 )     (142,857 )
Payments of principal on term loan
    (642,858 )     (642,858 )
Payment of principal on industrial revenue bond
    (330,000 )     (305,000 )
Borrowing on construction loans
          7,878,663  
Proceeds from issuance of common stock
    33,920        
 
           
Net cash provided by (used in) financing activities
    (1,796,081 )     6,242,896  
 
           
 
               
Net change in cash and cash equivalents
    (1,064,627 )      
 
               
Cash and cash equivalents at beginning of period
    4,141,838        
 
           
 
               
Cash and cash equivalents at end of period
  $ 3,077,211     $  
 
           
Cash paid for:
               
Interest
  $ 542,510     $ 433,240  
 
           
Income taxes (net of tax refunds)
  $ 167,812     $ 326,000  
 
           
Non Cash:
               
Fixed asset purchases in accounts payable
  $ 65,545     $ 175,317  
 
           
See notes to unaudited consolidated financial statements.

 

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Core Molding Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and include all of the information and disclosures required by accounting principles generally accepted in the United States of America for interim reporting, which are less than those required for annual reporting. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (all of which are normal and recurring in nature) necessary to present fairly the financial position of Core Molding Technologies, Inc. and its subsidiaries (“Core Molding Technologies” or the “Company”) at June 30, 2010, and the results of operations and cash flows for the six months ended June 30, 2010. The “Notes to Consolidated Financial Statements,” which are contained in the 2009 Annual Report to Shareholders, should be read in conjunction with these consolidated financial statements.
Core Molding Technologies 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. Core Molding Technologies operates four production facilities in Columbus, Ohio; Batavia, Ohio; Gaffney, South Carolina; and Matamoros, Mexico. The Columbus and Gaffney facilities produce reinforced plastics by compression molding sheet molding compound (“SMC”) in a closed mold process. The Batavia facility produces reinforced plastic products by a robotic spray-up open mold process and resin transfer molding (“RTM”) closed mold process utilizing multiple insert tooling (“MIT”). The Matamoros facility utilizes spray-up and hand lay-up open mold processes, RTM and SMC closed mold process to produce reinforced plastic products.
As disclosed in the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2010 the Company determined that certain of its previously filed financial statements contained an error related to the understatement of a deferred tax asset for certain retiree drug subsidies (“RDS”) available to sponsors of retiree health benefit plans that provide a benefit that is at least actuarially equivalent to the benefits under Medicare Part D. In order to assess materiality with respect to these errors, the Company considered Staff Accounting Bulletin (SAB) 99, Materiality and SAB 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, and determined that the impact of these errors on prior period consolidated financial statements was immaterial. Accordingly, the Company’s consolidated balance sheet as of December 31, 2009 and the related consolidated statements of operations and cash flows for the three and six months ended June 30, 2009 were revised and reflect the correction of this immaterial error. Correction of this error in the Company’s consolidated balance sheet as of December 31, 2009 resulted in an increase in deferred tax assets of approximately $1,035,000, an increase to retained earnings of approximately $618,000 and an increase to accumulated other comprehensive income of approximately $417,000. The consolidated results of operations and other comprehensive loss for the three and six months ended June 30, 2009 reflect an increase in income tax benefit of approximately $22,000 and $45,000, respectively.
2. Net Income (Loss) per Common Share
Net income (loss) per common share is computed based on the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed similarly but includes the effect of the assumed exercise of dilutive stock options and restricted stock under the treasury stock method.

 

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The computation of basic and diluted net income (loss) per common share is as follows:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2010     2009     2010     2009  
 
                               
Net income (loss)
  $ 441,303     $ (844,810 )   $ 304,361     $ (1,482,304 )
 
                               
Weighted average common shares Outstanding
    6,817,365       6,784,442       6,808,542       6,769,442  
Plus: dilutive options assumed exercised
    519,825             519,825        
Less: shares assumed repurchased with proceeds from exercise
    398,815             323,480        
Plus: dilutive effect of nonvested restricted stock grants
    140,584             127,289        
 
                       
Weighted average common and potentially issuable common shares outstanding
    7,078,959       6,784,442       7,132,176       6,769,442  
 
                       
 
                               
Basic net income (loss) per common share
  $ 0.06     $ (0.12 )   $ 0.04     $ (0.22 )
Diluted net income (loss) per common share
  $ 0.06     $ (0.12 )   $ 0.04     $ (0.22 )
25,000 shares of unexercised stock options at June 30, 2010 and 570,225 stock options at June 30, 2009 were not included in diluted earnings per share, as they were anti-dilutive.
3. Sales
Core Molding Technologies currently has two major customers, Navistar, Inc. (“Navistar”) and PACCAR, Inc. (“PACCAR”). Major customers are defined as customers whose sales individually consist of more than ten percent of total sales. The following table presents sales revenue for the above-mentioned customers for the three and six months ended June 30, 2010 and 2009:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2010     2009     2010     2009  
 
                               
Navistar product sales
  $ 12,888,372     $ 8,979,649     $ 23,785,041     $ 19,036,872  
Navistar tooling sales
    1,342,434       171,953       1,771,359       474,748  
 
                       
Total Navistar sales
    14,230,806       9,151,602       25,556,400       19,511,620  
 
                               
PACCAR product sales
    5,347,502       5,482,819       11,134,611       9,674,548  
PACCAR tooling sales
    643,965       195,220       889,460       206,820  
 
                       
Total PACCAR sales
    5,991,467       5,678,039       12,024,071       9,881,368  
 
                               
Other product sales
    3,237,419       2,181,337       6,249,573       5,762,665  
Other tooling sales
    16,100       289,130       87,788       528,572  
 
                       
Total other sales
    3,253,519       2,470,467       6,337,361       6,291,237  
 
                               
Total product sales
    21,473,293       16,643,805       41,169,225       34,474,085  
Total tooling sales
    2,002,499       656,303       2,748,607       1,210,140  
 
                       
Total sales
  $ 23,475,792     $ 17,300,108     $ 43,917,832     $ 35,684,225  
 
                       

 

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4. Comprehensive Income (Loss)
Comprehensive income (loss) represents net income (loss) plus the results of certain equity changes not reflected in the Consolidated Statements of Operations. The components of comprehensive income (loss), net of tax, are as follows:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2010     2009     2010     2009  
 
                               
Net income (loss)
  $ 441,303     $ (844,810 )   $ 304,361     $ (1,482,304 )
 
                               
Curtailment of post retirement benefit
    298,000             298,000        
 
                               
Hedge accounting effect of interest rate swaps, net of deferred income tax expense of $9,945, and $20,448 for the three and six months ended June 30, 2010 and deferred income tax expense of $15,620 and $10,030 for the three and six months ended June 30, 2009, respectively
    19,304       31,468       39,693       20,614  
 
                               
Amortization of previously unrecognized postretirement plan loss, net of deferred tax expense of $9,917 and $19,607 for the three and six months ended June 30, 2010, respectively.
    19,250             38,059        
 
                               
 
                       
Comprehensive income (loss)
  $ 777,857     $ (813,342 )   $ 680,113     $ (1,461,690 )
 
                       
5. Postretirement Benefits
The components of expense for all of Core Molding Technologies’ postretirement benefits plans for the three and six months ended June 30, 2010 and 2009 are as follows:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2010     2009     2010     2009  
Pension expense:
                               
Defined contribution plan contributions
  $ 80,000     $ 73,000     $ 171,000     $ 176,000  
Multi-employer plan contributions
    86,000       87,000       208,000       195,000  
 
                       
Total pension expense
    166,000       160,000       379,000       371,000  
 
                       
 
                               
Health and life insurance:
                               
Service cost
    87,000       152,000       180,000       304,000  
Interest cost
    269,000       237,000       538,000       474,000  
Amortization of net loss
    29,000             58,000        
 
                       
Net periodic benefit cost
    385,000       389,000       776,000       778,000  
 
                       
 
                               
Total postretirement benefits expense
  $ 551,000     $ 549,000     $ 1,155,000     $ 1,149,000  
 
                       
Core Molding Technologies has made contributions of approximately $555,000 to pension plans and $192,000 of postretirement healthcare payments through June 30, 2010, and expects to make approximately $180,000 of multi-employer pension payments through the remainder of 2010. The Company also expects to make approximately $481,000 of postretirement healthcare payments through the remainder of 2010, all of which are accrued.

 

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The Company’s liability for post retirement healthcare and life insurance relates primarily to its Columbus, Ohio employee base. As a result of the shift of production of certain product lines from the Company’s Columbus, Ohio facility to the Matamoros facility, the Company recognized a curtailment in its other post employment benefits liability of $298,000 during the second quarter of 2010 due to remeasurement of this liability.
6. Debt
Credit Agreement; Amendments
On December 9, 2008, the Company and its wholly owned subsidiary, Corecomposites de Mexico, S. de R.L. de C.V., entered into a Credit Agreement to refinance some existing debt and borrow funds to finance the construction of the Company’s new manufacturing facility in Mexico.
Under this Credit Agreement, the Company received certain loans, subject to the terms and conditions stated in the agreement, which include (i) a $12,000,000 Capex loan, (ii) an $8,000,000 Mexican loan, (iii) an $8,000,000 revolving line of credit, and (iv) a $2,678,563 term loan to refinance an existing term loan. The Credit Agreement is secured by a guarantee of each U.S. subsidiary of the Company, and by a lien on substantially all of the present and future assets of the Company and its U.S. subsidiaries, except that only 65% of the stock issued by Corecomposites de Mexico, S. de C.V. has been pledged. The $8,000,000 Mexican loan is also secured by substantially all of the present and future assets of the Company’s Mexican subsidiary.
On March 8, 2010, the Company entered into a fourth amendment (the “Fourth Amendment”) to the Credit Agreement. Pursuant to the terms of the Fourth Amendment, the parties agreed to modify certain terms of the Credit Agreement. These modifications included (1) modification of the definition of EBITDA to add back transition costs of up to $2,000,000 associated with the relocation of certain products from the Company’s Columbus, Ohio facility to its Matamoros, Mexico facility (2) modification to the fixed charge definition to exclude capital expenditures of up to $2,000,000 associated with the relocation of certain products from the Company’s Columbus, Ohio facility to its Matamoros, Mexico facility; (3) retroactive modification of the amortization schedule of the Mexican loan to forgo the principal payment due January 31, 2010 of $1,600,000 as a result of the Company limiting its borrowing to $6,400,000 instead of the full amount of the loan contemplated ($8,000,000); and (4) consent to transfer certain assets of the Company from Columbus, Ohio to Matamoros, Mexico.
On May 11, 2010, the Company entered into a fifth amendment (the “Fifth Amendment”) to the Credit Agreement. Pursuant to the terms of the Fifth Amendment, the parties agreed to modify certain terms of the Credit Agreement. These modifications included (1) decrease in the applicable margin for interest rates to 275 basis points from 375 basis points for the Capex and Mexican loans and the revolving line of credit, effective May 1, 2010 and (2) extension of the commitment for the revolving line of credit to April 30, 2012. Previous amendments are disclosed in Core Molding Technologies 2009 Annual Report on Form 10-K.
Bank Covenants
The Company is required to meet certain financial covenants included in the Credit Agreement with respect to leverage ratios, fixed charge ratios, capital expenditures as well as other customary affirmative and negative covenants. As of June 30, 2010, the Company was in compliance with its financial covenants associated with the loans made under the Credit Agreement as described above.
Based upon the Company’s forecasts, which are primarily based on industry analysts’ estimates of heavy and medium-duty truck production volumes, as well as other assumptions management believes to be reasonable, management believes that the Company will be able to maintain compliance with the financial covenants set forth in the Credit Agreement, as amended, for the next 12 months. Management believes that cash flow from operating activities together with available borrowings under the Credit Agreement will be sufficient to meet Core Molding Technologies liquidity needs. However, if a material adverse change in the financial position of Core Molding Technologies should occur, or if actual sales or expenses are substantially different than what has been forecasted, Core Molding Technologies’ liquidity and ability to obtain further financing to fund future operating and capital requirements could be negatively impacted.

 

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Interest Rate Swaps
In conjunction with its variable rate Industrial Revenue Bond, the Company entered into an interest rate swap agreement, which was initially designated as a cash flow hedging instrument. Under this agreement, the Company pays a fixed rate of 4.89% to the bank and receives 76% of the 30-day commercial paper rate. The swap term and notional amount matches the payment schedule on the IRB with final maturity in April 2013. During 2010 the Company determined this interest rate swap was no longer highly effective. As a result, the Company discontinued the use of hedge accounting effective January 1, 2010 related to this swap, and began recording mark-to-market adjustments within interest expense in the Company’s Consolidated Statement of Operations. The pre-tax amount previously recognized in Accumulated Other Comprehensive Loss, totaling $199,990 as of December 31, 2009, is being amortized as an increase to interest expense of $3,384 per month, net of tax, over the remaining term of the interest rate swap agreement beginning January 2010. The fair value of the swap was a liability of $170,725 and $199,990 as of June 30, 2010 and December 31, 2009, respectively. The Company recorded interest income of $29,265 for a mark-to-market adjustment of swap fair value for the first six months of 2010 related to this swap. The notional amount at June 30, 2010 for this swap was $2,285,000.
Effective January 1, 2004, the Company entered into an interest rate swap agreement, which is designated as a cash flow hedge of the Term loan. Under this agreement, the Company pays a fixed rate of 5.75% to the bank and receives LIBOR plus 200 basis points. The swap term and notional amount matches the payment schedule on the secured Term loan with final maturity in January 2011. The interest rate swap is a highly effective hedge because the amount, benchmark interest rate index, term, and repricing dates of both the interest rate swap and the hedged variable interest cash flows are substantially the same. The fair value of the swap was a liability of $8,525 and $27,492 as of June 30, 2010 and December 31, 2009 respectively. While the Company is exposed to credit loss on its interest rate swap in the event of non-performance by the counterparty to the swap, management believes that such non-performance is unlikely to occur given the financial resources of the counterparty. The notional amount at June 30, 2010 for this swap was $749,989.
Effective December 18, 2008, the Company entered into an interest rate swap agreement that became effective May 1, 2009, which was designated as a cash flow hedge of the $12,000,000 Capex loan. Under this agreement, the Company pays a fixed rate of 2.295% to the counterparty and receives LIBOR. Effective March 31, 2009, the interest terms in the Company’s Credit Agreement related to the $12,000,000 Capex loan were amended. The Company then determined that the interest rate swap was no longer highly effective. As a result, the Company discontinued the use of hedge accounting effective March 31, 2009 related to this swap, and began recording mark-to-market adjustments within interest expense in the Company’s Consolidated Statement of Operations. The pre-tax amount previously recognized in Accumulated Other Comprehensive Loss, totaling $145,684 as of March 31, 2009, is being amortized as an increase to interest expense of $1,145 per month, net of tax, over the remaining term of the interest rate swap agreement beginning June 2009. The fair value of the swap as of June 30, 2010 and December 31, 2009 was a liability of $240,903 and an asset of $28,673, respectively. The Company recorded interest expense of $269,576 for a mark-to-market adjustment of swap fair value for the first six months of 2010 related to this swap. The notional amount at June 30, 2010 for this swap was $10,142,857.
Line of Credit
At June 30, 2010, the Company had available under the Credit Agreement an $8,000,000 variable rate bank revolving line of credit scheduled to mature on April 30, 2012. The line of credit bears interest at daily LIBOR plus 275 basis points. The line of credit is collateralized by all the Company’s assets. At June 30, 2010 and December 31, 2009 there was no outstanding balance on the bank revolving line of credit.
7. Income Taxes
In the first quarter of 2010 the Patient Protection and Affordable Care Act (“PPACA”) was signed into law. The PPACA changes the tax treatment related to existing RDS available to sponsors of retiree health benefit plans that provide a benefit that is at least actuarially equivalent to the benefits under Medicare Part D. As a result of the PPACA, RDS payments will effectively become taxable in tax years beginning in 2013, by requiring the amount of the subsidy received to be offset against the Company’s deduction for health care expenses. Accordingly, during the first quarter of 2010, the Company recorded a one time charge to income tax expense of $1,021,000 related to the write down of its deferred tax asset for RDS.

 

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Income tax expense for the six months ended June 30, 2010 is estimated to be approximately $1,702,000 or 85% of total earnings before taxes. Without the write down of the deferred tax asset, the Company’s effective tax rate was 34% for the six months ended June 30, 2010. Income tax benefit for the six months ended June 30, 2009 was estimated to be approximately $856,000, or 37% of total earnings before taxes.
The Company follows the accounting guidance related to the uncertainty in income taxes. As of June 30, 2010, the Company had no liability for unrecognized tax benefit liability under this guidance. The Company does not anticipate that the unrecognized tax benefits will significantly change within the next twelve months.
The Company files income tax returns in the U.S. federal jurisdiction, Mexico and various state jurisdictions. The Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for the years before 2007 and is subject to income tax examinations by Mexican authorities since the Company began business in Mexico in 2001. There are currently no income tax audits in process.
8. Stock Based Compensation
The Company has a Long Term Equity Incentive Plan (the “2006 Plan”), as approved by the Company’s stockholders in May 2006. This 2006 Plan replaced the Long Term Equity Incentive Plan (the “Original Plan”) as originally approved by the stockholders in May 1997 and as amended in May 2000. The 2006 Plan allows for grants to directors and key employees of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, performance shares, performance units and other incentive awards (“Stock Awards”) up to an aggregate of 3,000,000 awards, each representing a right to buy a share of Core Molding Technologies common stock. Stock Awards can be granted under the 2006 Plan through the earlier of December 31, 2015, or the date the maximum number of available awards under the 2006 Plan have been granted.
Stock Options
The following summarizes the activity relating to stock options under the plans mentioned above for the six months ended June 30, 2010:
                 
    Number     Weighted  
    of     Average  
    Options     Exercise Price  
Outstanding at December 31, 2009
    558,825     $ 3.30  
Exercised
    (12,000 )     2.83  
Granted
           
Forfeited
    (2,400 )     3.36  
 
           
Outstanding at June 30, 2010
    544,425     $ 3.31  
 
           
Exercisable at June 30, 2010
    508,325     $ 3.32  
 
           
The following summarizes the status of, and changes to, unvested options during the six months ended June 30, 2010:
                 
    Number     Weighted  
    Of     Average  
    Options     Exercise Price  
Unvested at December 31, 2009
    44,500     $ 3.29  
Granted
           
Vested
    (8,000 )     3.28  
Forfeited
    (400 )     6.40  
 
           
Unvested at June 30, 2010
    36,100     $ 3.26  
 
           
At June 30, 2010 and 2009, there was $37,692 and $100,161, respectively, of total unrecognized compensation expense, related to unvested stock options granted under the plans. Total compensation cost related to incentive stock options for the six months ended June 30, 2010 and 2009 was $24,810 and, $45,619, respectively. This compensation expense is allocated such that $23,803 and $39,438 are included in selling, general and administrative expenses and $1,007 and $6,181 are recorded in cost of sales for the six months ended June 30, 2010 and 2009, respectively.

 

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Restricted Stock
Beginning in 2006, Core Molding Technologies began granting shares of its common stock to certain directors, officers, and key managers in the form of unvested stock (“Restricted Stock”). These awards are recorded at the market value of Core Molding Technologies’ common stock on the date of issuance and amortized ratably as compensation expense over the applicable vesting period.
The following summarizes the status of Restricted Stock grants as of June 30, 2010 and changes during the six months ended June 30, 2010:
                 
            Weighted  
    Number     Average  
    Of     Grant Date  
    Shares     Fair Value  
Unvested balance at December 31, 2009
    187,445     $ 3.91  
Granted
    77,040       5.20  
Vested
    (17,659 )     5.41  
Forfeited
           
 
           
Unvested balance at June 30, 2010
    246,826     $ 4.21  
 
           
As of June 30, 2010 and 2009, there was $604,823 and $547,341, respectively, of total unrecognized compensation expense related to Restricted Stock granted under the 2006 Plan. The total compensation costs related to restricted stock grants for the six months ended June 30, 2010 and 2009 was $163,952 and $132,575, respectively, all of which was recorded to selling, general and administrative expense.
9. Fair Value of Financial Instruments
The Company’s financial instruments consist of long-term debt, interest rate swaps, accounts receivable, and accounts payable. The carrying amount of these financial instruments approximated their fair value.
In September 2006, the Financial Accounting Standards Board (“FASB”) issued a standard to define fair value, establish a framework for measuring fair value and to expand disclosures about fair value measurements. This standard does not change the requirements to apply fair value in existing accounting standards. Under this standard, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. The standard clarifies that fair value should be based on the assumptions market participants would use when pricing the asset or liability.
To increase consistency and comparability in fair value measurements, this standard establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels. The level in the fair value hierarchy disclosed is based on the lowest level of input that is significant to the fair value measurement. The three levels of the fair value hierarchy are as follows:
   
Level 1 inputs are quoted prices (unadjusted) in active markets for identical asset or liabilities that the company has the ability to access as of the reporting date.
 
   
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly through corroboration with observable market data.
 
   
Level 3 inputs are unobservable inputs, such as internally developed pricing models for the asset or liability due to little or no market activity for the asset or liability.

 

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The Company’s has three Level 2 fair value measurements all of which relate to the Company’s interest rate swaps. The Company utilizes interest rate swap contracts to manage its targeted mix of fixed and floating rate debt, and these swaps are valued using observable benchmark rates at commonly quoted intervals for the full term of the swaps. These interest rate swaps are discussed in detail in Note 6.
The following table presents financial liabilities measured and recorded at fair value on the Company’s Consolidated Balance Sheet on a recurring basis and their level within the fair value hierarchy as of June 30, 2010 and December 31, 2009:
Recurring Fair Value Measurements
                                 
    (Level 1)     (Level 2)     (Level 3)     June 30, 2010  
Liabilities
                               
Interest rate swaps
  $     $ 420,153     $     $ 420,153  
 
                       
Total
  $     $ 420,153     $     $ 420,153  
 
                       
                                 
    (Level 1)     (Level 2)     (Level 3)     December 31, 2009  
Liabilities
                               
Interest rate swaps
  $     $ 198,809     $     $ 198,809  
 
                       
Total
  $     $ 198,809     $     $ 198,809  
 
                       
There were no non-recurring fair value measurements for the quarter ended June 30, 2010.
In March 2008, the FASB issued a standard to amend and expand the disclosure requirements of derivative instruments with the intent to provide users of the financial statements with an enhanced understanding of how and why an entity uses derivative instruments, how these derivatives are accounted for and how the respective reporting entity’s financial statements are affected. The Company adopted this standard on January 1, 2009.
Core Molding Technologies derivative instruments located on the Consolidated Balance Sheets (unaudited) were as follows:
                         
            June 30,     December 31,  
            2010     2009  
    Balance Sheet Location     Fair Value     Fair Value  
Derivatives designated as hedging instruments Interest rate risk activities
  Interest rate swaps   $ (8,525 )   $ 227,482  
 
                       
Derivatives not designated as hedging instruments Interest rate risk activities
  Interest rate swaps   $ (411,628 )   $ (28,673 )
 
                   
Total Derivatives
          $ (420,153 )   $ 198,809  
 
                   

 

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The effect of derivative instruments on the Consolidated Statement of Operations (unaudited) was as follows:
Derivatives in Cash Flow Hedging Relationships
                                         
    Amount of (Gain) Loss     Location of (Gain) Loss     Amount of (Gain) Loss  
    Recognized in OCI on     Reclassified from AOCI     Reclassified from AOCI  
Derivatives in Cash Flow   Derivative (Effective     into Income (Effective     into Expense (Effective  
Hedging Relationships   Portion)     Portion)     Portion)  
    June 30,     June 30,           June 30,     June 30,  
Three months ended   2010     2009           2010     2009  
Interest rate swaps
  $ (8,662 )   $ (67,182 )   Interest expense, net   $ 7,499     $ 53,990  
 
                             
                                         
    June 30,     June 30,             June 30,     June 30,  
Six months ended   2010     2009             2010     2009  
Interest rate swaps
  $ (18,967 )   $ (61,090 )   Interest expense, net   $ 17,872     $ 109,040  
 
                             
                         
    Location of (Gain) Loss     Amount of (Gain) Loss Recognized    
    Recognized in Income on     in Income of Derivative    
  Derivative (Ineffective Portion     (Ineffective Portion and Amount  
Derivatives in Cash Flow Hedging   and Amount Excluded from     Excluded from Effectiveness  
Relationships   Effectivness Testing)     Testing)  
          June 30,     June 30,  
Three months ended         2010     2009  
Interest rate swaps
  Interest (income) expense   $     $ (21,293 )
 
                 
                         
            June 30,     June 30,  
Six months ended           2010     2009  
Interest rate swaps
  Interest (income) expense   $     $ (31,591 )
 
                 
Derivatives not designated as hedging instruments
                         
      Amount of  
      Realized/Unrealized (Gain)  
Derivatives Not Designated as Hedging   Location of (Gain) Loss Recognized in     Loss Recognized in Income  
Instruments   Income on Derivatives     on Derivatives  
          June 30,     June 30,  
Three months ended         2010     2009  
Interest rate swaps
  Interest (income) expense   $ 170,686     $ (220,871 )
 
                 
                         
            June 30,     June 30,  
Six months ended           2010     2009  
Interest rate swaps
  Interest (income) expense   $ 267,485     $ (220,871 )
 
                 
As discussed in Note 6, the Company discontinued the use of hedge accounting for two of its interest rate swaps, effective March 31, 2009 for the Capex swap and January 1, 2010 for the IRB swap. The Company now records all mark to market adjustments related to these interest rate swaps within interest expense in the Company’s Consolidated Statement of Operations, since the date the Company discontinued hedge accounting for each swap. It is anticipated that during the next twelve months the expiration and settlement of cash flow hedge contracts along with the amortization of losses on discontinued hedges will result in income statement recognition of amounts currently classified in accumulated other comprehensive loss of approximately $54,350, net of taxes.

 

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10. Subsequent Event
On August 7, 2010 the Company reached a new labor agreement with represented employees at the Company’s Columbus, Ohio production facility. The new labor agreement extends through August 10, 2013. A provision of this contract provides for the elimination of post retirement health and life insurance benefits for all current and future members of the union who had not retired as of August 7, 2010 in consideration for a one-time cash payment to each current member. The cost of the one-time payment will be approximately $1,300,000 and the Company plans for the cash buy-out to be completed by the end of August. At June 30, 2010, the Company had a recorded liability of $18,992,000 for post retirement health and life insurance benefits. This liability had been recorded to reflect the Company’s obligations for both retired and current members of the union as well as certain non represented employees. As consideration for this one-time cash payment, the Company will eliminate the portion of this liability that was related to the current members of the union. The Company is evaluating the actuarial impacts of this settlement on the Company’s Consolidated Financial Statements.

 

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Part I — Financial Information
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of the federal securities laws. As a general matter, forward-looking statements are those focused upon future plans, objectives or performance as opposed to historical items and include statements of anticipated events or trends and expectations and beliefs relating to matters not historical in nature. Such forward-looking statements involve known and unknown risks and are subject to uncertainties and factors relating to Core Molding Technologies operations and business environment, all of which are difficult to predict and many of which are beyond Core Molding Technologies’ control. These uncertainties and factors could cause Core Molding Technologies’ actual results to differ materially from those matters expressed in or implied by such forward-looking statements.
Core Molding Technologies believes that the following factors, among others, could affect its future performance and cause actual results to differ materially from those expressed or implied by forward-looking statements made in this report: business conditions in the plastics, transportation, watercraft and commercial product industries; federal and state regulations (including engine emission regulations); general economic, social and political environments in the countries in which Core Molding Technologies operates; dependence upon two major customers as the primary source of Core Molding Technologies’ sales revenues; recent efforts of Core Molding Technologies to expand its customer base; the actions of competitors, customers, and suppliers; failure of Core Molding Technologies’ suppliers to perform their obligations; the availability of raw materials; inflationary pressures; new technologies; regulatory matters; labor relations; the loss or inability of Core Molding Technologies to attract and retain key personnel; federal, state and local environmental laws and regulations; the availability of capital; the ability of Core Molding Technologies to provide on-time delivery to customers, which may require additional shipping expenses to ensure on-time delivery or otherwise result in late fees; risk of cancellation or rescheduling of orders; risks related to the transfer of production from Core Molding Technologies Columbus facility to its Matamoros facility; management’s decision to pursue new products or businesses which involve additional costs, risks or capital expenditures; and other risks identified from time-to-time in Core Molding Technologies other public documents on file with the Securities and Exchange Commission, including those described in Item 1A of the 2009 Annual Report to Shareholders on Form 10-K.
Overview
Core Molding Technologies is a compounder of sheet molding composite (“SMC”) and molder of fiberglass reinforced plastics, primarily for the medium and heavy-duty truck market, which accounted for 95% of the Company’s sales for the six months ended June 30, 2010. Core Molding Technologies produces high quality fiberglass reinforced molded products and SMC materials for varied markets, including light, medium and heavy-duty trucks, automobiles and automotive aftermarkets, personal watercraft, and other commercial products. The demand for Core Molding Technologies’ products is affected by economic conditions in the United States, Canada, and Mexico. Core Molding Technologies’ manufacturing operations have a significant fixed cost component. Accordingly, during periods of changing demands, the profitability of Core Molding Technologies’ operations may change proportionately more than revenues from operations.
On December 31, 1996, Core Molding Technologies acquired substantially all of the assets and assumed certain liabilities of Columbus Plastics, a wholly owned operating unit of Navistar’s truck manufacturing division since its formation in late 1980. Columbus Plastics, located in Columbus, Ohio, was a compounder and compression molder of SMC. In 1998, Core Molding Technologies began compression molding operations at its second facility in Gaffney, South Carolina, and in October 2001, Core Molding Technologies acquired certain assets of Airshield Corporation. As a result of this acquisition, Core Molding Technologies expanded its fiberglass molding capabilities to include the spray up, hand-lay-up open mold processes and resin transfer (“RTM”) closed molding utilizing a vacuum infusion process. In September 2004, Core Molding Technologies acquired substantially all the operating assets of Keystone Restyling Products, Inc., a privately held manufacturer and distributor of fiberglass reinforced products for the automotive-aftermarket industry. In August 2005, Core Molding Technologies acquired certain assets of the Cincinnati Fiberglass Division of Diversified Glass, Inc., a Batavia, Ohio-based, privately held manufacturer and distributor of fiberglass reinforced plastic components supplied primarily to the heavy-duty truck market. The Batavia, Ohio facility produces reinforced plastic products by a spray-up open mold process and resin transfer molding (“RTM”) utilizing multiple insert tooling (“MIT”) closed mold process. In June of 2009, the Company completed construction of its new 437,000 square foot production facility in Matamoros, Mexico that replaced its leased facility. In conjunction with the construction of its new facility, the Company also added compression molding operations in Matamoros, Mexico.

 

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Core Molding Technologies recorded net income for the six months ended June 30, 2010 of $304,000 or $0.04 per basic and diluted share, compared with a net loss of $1,482,000, or $0.22 per basic and diluted share, for the six months ended June 30, 2009. In March 2010, Congress passed the Patient Protection and Affordable Care Act (“PPACA”) which repealed the tax benefits the Company previously received related to certain retiree prescription drug costs. As a result of this change, the Company reduced its deferred tax asset related to that subsidy and recorded a charge to income tax expense of $1,021,000. Without this one time charge, the Company’s net income for the six month ended June 30, 2010 would have been $1,325,000 or $0.19 per basic and diluted share.
During the six months ended June 30, 2010, the Company recorded approximately $1,320,000 of expense for transfer costs associated with the move of certain product lines from its Columbus, Ohio production facility to its Matamoros, Mexico production facility and expects to incur up to $480,000 of additional costs during the remainder of 2010. During the six months ended June 30, 2009, the Company incurred and recorded approximately $1,983,000 of expenses for transfer and start-up costs associated with the construction of the Company’s new production facility in Mexico.
The Company anticipates 2010 sales levels to increase over the 2009 levels, as industry analysts continue to forecast some improvement in truck production for the second half of 2010. For the first six months of 2010 product sales increased 19% as compared to the same period in 2009.
Results of Operations
Three Months Ended June 30, 2010, As Compared To Three Months Ended June 30, 2009
Net sales for the three months ended June 30, 2010, totaled $23,476,000, representing an approximate 36% increase from the $17,300,000 reported for the three months ended June 30, 2009. Included in total sales were tooling project sales of $2,002,000 and $656,000 for the three months ended June 30, 2010 and June 30, 2009, respectively. Tooling project sales result from non-production billings to customers primarily for molds and assembly equipment specific to their products. These sales are sporadic in nature. Total product sales, excluding tooling project sales, were approximately 29% higher for the three months ended June 30, 2010, as compared to the same period a year ago. The primary reason for the increase is higher demand from the North American medium and heavy-duty truck market.
Sales to Navistar totaled $14,231,000 for the three months ended June 30, 2010, increasing 55% from $9,152,000 in sales for the three months ended June 30, 2009. Included in total sales was $1,342,000 of tooling sales for the three months ended June 30, 2010 compared to $172,000 for the same three months in 2009. Product sales to Navistar increased by 44% for the three months ended June 30, 2010 versus the same period of the prior year. The primary reason for the increase is the higher demand for North American medium and heavy-duty trucks as well as more orders for Navistar’s military product line.
Sales to PACCAR totaled $5,991,000 for the three months ended June 30, 2010, increasing 6% from $5,678,000 in sales for the three months ended June 30, 2009. Included in total sales was $644,000 of tooling sales for the three months ended June 30, 2010 compared to $195,000 for the same three months in 2009. Product sales to PACCAR decreased by 2% for the three months ended June 30, 2010 compared to the same period of the prior year. The decrease in total product sales was primarily due to decreased sales volumes for a product that is reaching the end of its production life. This decrease was off-set by higher demand of other products the Company manufactures for PACCAR due to the overall conditions in the medium and heavy duty truck markets as noted above.
Sales to other customers for the three months ended June 30, 2010 increased 32% to $3,254,000 compared to $2,470,000 for the three months ended June 30, 2009. Included in total sales is $16,000 of tooling sales for the three months ended June 30, 2010 compared to $289,000 for the same three months in 2009. The increase in sales was primarily due to an increase in product sales to other North American medium and heavy-duty truck manufacturers amounting to approximately $924,000, as well as additional sales of approximately $454,000 to a new customer. These increases were partially off-set by a decrease in sales to a customer for whom the Company manufactures certain commercial products.

 

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Gross margin was approximately 15% of sales for the three months ended June 30, 2010, compared with 6% for the three months ended June 30, 2009. Negatively impacting gross margin for the three months ending June 30, 2010 were costs of $1,000,000 related to the movement of product lines from the Company’s Columbus, Ohio facility to its Matamoros, Mexico facility. For the same period in 2009, the Company incurred approximately $681,000 of transition and start up costs associated with the construction of the Company’s new production facility in Mexico. These costs had an unfavorable impact of approximately 4% on gross margin for each of the three months ended June 30, 2010 and 2009. Contributing to the increase in gross margin for the three months ended June 30, 2010 compared to the same three months in 2009 was better fixed cost absorption due to higher production volumes as well as production efficiencies. The Company’s manufacturing operations have significant overhead costs such as certain labor, energy, depreciation, lease expense and certain benefit costs, including post retirement healthcare costs, which do not change proportionately with production.
Selling, general and administrative expenses (“SG&A”) totaled $2,293,000 for the three months ended June 30, 2010, compared to $2,256,000 for the three months ended June 30, 2009. Increases in foreign currency losses, wages and travel were partially offset by decreases in professional and outside services and business insurance costs.
Interest expense totaled $457,000 for the three months ended June 30, 2010, compared to interest expense of $30,000 for the three month ended June 30, 2009. The primary cause for this fluctuation in interest expense between periods is mark-to-market adjustments related to interest rate swaps. Mark-to-market adjustments on interest rate swaps that are not designated as hedging instruments are recorded directly to interest expense and resulted in additional interest expense of $171,000 for the three months ended June 30, 2010 compared to a reduction of interest expense of $221,000 for the same three months during 2009.
Income tax expense for the three months ended June 30, 2010, is estimated to be approximately 34% of total earnings before taxes. In the three months ended June 30, 2009 income tax benefit was estimated to be 35% of total losses before taxes.
Core Molding Technologies recorded net income for the three months ended June 30, 2010 of $441,000 or $0.06 per basic and diluted share, compared with a net loss of $845,000, or $0.12 per basic and diluted share, for the three months ended June 30, 2009.
Six Months Ended June 30, 2010, As Compared To Six Months Ended June 30, 2009
Net sales for the six months ended June 30, 2010, totaled $43,918,000, representing an approximate 23% increase from the $35,684,000 reported for the six months ended June 30, 2009. Included in total sales were tooling project sales of $2,749,000 and $1,210,000 for the six months ended June 30, 2010 and June 30, 2009, respectively. Tooling project sales result from non-production billings to customers primarily for molds and assembly equipment specific to their products. These sales are sporadic in nature. Total product sales, excluding tooling project sales, increased by 19% to $41,169,000 for the six months ended June 30, 2010 as compared to $34,474,000 for the six months ended June 30, 2009. The primary reason for the increase is higher demand for North American medium and heavy-duty trucks.
Sales to Navistar totaled $25,556,000 for the six months ended June 30, 2010, as compared to $19,512,000 for the six months ended June 30, 2009. Included in total sales was $1,771,000 of tooling sales for the six months ended June 30, 2010 compared to $475,000 for the six months ended June 30, 2009. Total product sales to Navistar increased by 25% for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The primary reason for the increase in product sales were the market conditions for medium and heavy-duty trucks as noted above as well as more orders for Navistar’s military product line.
Sales to PACCAR totaled $12,024,000 for the six months ended June 30, 2010, as compared to $9,881,000 reported for the six months ended June 30, 2009. Included in total sales was $889,000 of tooling sales for the six months ended June 30, 2010 compared to $207,000 for the six months ended June 30, 2009. Total product sales to PACCAR increased by 15% for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The increase in total product sales was also due to the above noted market conditions for medium and heavy-duty trucks.
Sales to other customers for the six months ended June 30, 2010 were $6,337,000 compared to $6,291,000 for the six months ended June 30, 2009. Contributing to the increase in sales to other customers were the market conditions for medium and heavy-duty trucks as noted above along with a new customer. These increases were partially off-set by a decrease in sales to a customer for whom the Company manufactures certain commercial products.

 

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Gross margin was approximately 17% of sales for the six months ended June 30, 2010, compared with 7% for the six months ended June 30, 2009. The Company incurred approximately $1,320,000 in transition costs related to the movement of product lines from its Columbus, Ohio facility to its Matamoros, Mexico facility for the six months ended June 30, 2010. For the same period in 2009, the Company incurred approximately $1,752,000 of transition and start up costs associated with the Company’s new production in Mexico. These cost had an unfavorable impact of approximately 3% and 5% on gross margin for the six months ended June 30, 2010 and 2009, respectively. Contributing to an increase in gross margin in 2010 was better fixed cost absorption due to higher production volumes. Production volumes increased due to increased demand as well as increasing inventory levels necessary to support the transfer of certain products from the Company’s Columbus facility to its Matamoros facility. The Company’s manufacturing operations have significant overhead costs such as certain labor, energy, depreciation and certain benefit costs, including post retirement healthcare costs, which do not change proportionately with production.
Selling, general and administrative expenses (“SG&A”) totaled $4,619,000 for the six months ended June 30, 2010, decreasing from $4,756,000 for the six months ended June 30, 2009. Included in SG&A at June 30, 2009 is approximately $231,000 of transition and start-up costs associated with building and moving productions from a previously leased facility to the Company’s new production facility in Mexico. None of the 2010 transition expenses related to the production line relocation are included in SG&A. Excluding the transition and start-up costs from 2009, the primary reason for the overall increase in SG&A was the impact of foreign currency on its operations in Mexico. The Company recognized foreign currency losses for the six months ended June 30, 2010 compared to foreign currency gains for the same six months in 2009.
Interest expense totaled $877,000 for the six months ended June 30, 2010, as compared to net interest expense of $140,000 for the six months ended June 30, 2009. The primary cause for this fluctuation in interest expense between periods is mark-to-market adjustments related to interest rate swaps. Mark-to-market adjustments on interest rate swaps that are not designated as hedging instruments are recorded directly to interest expense and resulted in additional interest expense of $268,000 for the six months ended June 30, 2010 compared to a reduction of interest expense of $221,000 for the same six months during 2009. Additionally, the Company capitalized interest of approximately $167,000 in 2009 related to its new production facility in Mexico which was placed into service in June 2009.
Income tax expense for the six months ended June 30, 2010, is estimated to be approximately 85% of total earnings before taxes or $1,702,000. In the six months ended June 30, 2009 income tax benefit was estimated to be 37% of total losses before taxes. The increase in the Company’s effective tax rate in 2010 as compared to 2009 is due to the impact of the write off of certain deferred tax assets of $1,021,000. The deferred tax write off was due to the passage of the Patient Protection and Affordable Care Act (“PPACA”) which repealed the tax benefit associated with certain retiree prescription drug subsidies previously recorded by the Company. Without this charge the Company’s estimated tax rate was 34% for the six months ended June 30, 2010.
Core Molding Technologies recorded net income for the six months ended June 30, 2010 of $304,000 or $0.04 per basic and diluted share, compared with a net loss of $1,482,000, or $0.22 per basic and diluted share, for the six months ended June 30, 2009.
Liquidity and Capital Resources
On March 8, 2010, the Company entered into a fourth amendment (the “Fourth Amendment”) to the Credit Agreement. Pursuant to the terms of the Fourth Amendment, the parties agreed to modify certain terms of the Credit Agreement. These modifications included (1) modification of the definition EBITDA to add back transition costs of up to $2,000,000 associated with the relocation of certain products from the Company’s Columbus, Ohio facility to its Matamoros, Mexico facility (2) modification to the fixed charge definition to exclude capital expenditures of up to $2,000,000 associated with the relocation of certain products from the Company’s Columbus, Ohio facility to its Matamoros, Mexico facility; (3) retroactive modification of the amortization schedule of the Mexican loan to forgo the principal payment due January 31, 2010 of $1,600,000 as a result of the Company limiting its borrowing to $6,400,000 instead of the full amount of the loan contemplated ($8,000,000); and (4) consent to transfer certain assets of the Company from Columbus, Ohio to Matamoros, Mexico.

 

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On May 11, 2010, the Company entered into a fifth amendment (the “Fifth Amendment”) to the Credit Agreement. Pursuant to the terms of the Fifth Amendment, the parties agreed to modify certain terms of the Credit Agreement. These modifications included (1) decrease in the applicable margin for interest rates to 275 basis points from 375 basis points for the Capex and Mexican loans and the revolving line of credit, effective May 1, 2010 and (2) extension of the commitment for the revolving line of credit to April 30, 2012. Previous amendments are disclosed in Core Molding Technologies 2009 Annual Report on Form 10-K.
The Company’s primary sources of funds have been cash generated from operating activities and borrowings from third parties. Primary cash requirements are for operating expenses and capital expenditures.
Cash provided by operating activities for the six months ended June 30, 2010 totaled $2,473,000. Net income of $304,000 positively impacted operating cash flows. Non-cash deductions of depreciation and amortization contributed $1,967,000 to operating cash flow. In addition, the increase in the postretirement healthcare benefits liability of $604,000 is not a current cash obligation, and this item will not be a cash obligation until additional employees retire and begin to utilize these benefits. Changes in working capital decreased cash provided by operating activities by $1,844,000. Changes in working capital primarily relate to an increase in accounts receivable due to increased product sales for the six months ended June 30, 2010 compared to the fourth quarter of 2009 as well as higher inventory levels. These were offset by higher accrued liabilities and accounts payable as of June 30, 2010 as compared to December 31, 2009.
Cash used in investing activities for the six months ended June 30, 2010 was $1,742,000, primarily representing capital improvements to our Matamoros facility to support product lines being moved from Columbus, Ohio to that facility. The Company currently plans an additional $1,894,000 of capital expenditures for the remainder of the year, of which $463,000 relates to the completion of the capital improvements to the Company’s production facility in Mexico. These capital additions will be funded by cash from operations and borrowings on the Company’s line of credit. The Company may also undertake other capital improvement projects in the future as deemed necessary and appropriate.
Financing activities decreased cash by $1,796,000. This decrease was a result of repayments of principal on the Company’s Capex loan of $857,000, term loan of $643,000 and industrial revenue bond of $330,000.
At June 30, 2010, the Company had cash on hand of $3,077,000 and a line of credit of $8,000,000, with a scheduled maturity of April 30, 2012. At June 30, 2010, Core Molding Technologies had no outstanding borrowings on the line of credit.
The Company is required to meet certain financial covenants included in the Credit Agreement with respect to leverage ratios, fixed charge ratios, capital expenditures as well as other customary affirmative and negative covenants. As of June 30, 2010, the Company was in compliance with its financial debt covenants.
Based on the Company’s forecasts which are primarily based on industry analysts’ estimates of heavy and medium-duty truck production volumes as well as other assumptions management believes to be reasonable, management believes that the Company will be able to maintain compliance with the covenants as amended under the Credit Agreement, as amended, for the next 12 months. Management believes that cash flow from operating activities together with available borrowings under the Credit Agreement will be sufficient to meet Core Molding Technologies liquidity needs. However, if a material adverse change in the financial position of Core Molding Technologies should occur, or if actual sales or expenses are substantially different than what has been forecasted, Core Molding Technologies’ liquidity and ability to obtain further financing to fund future operating and capital requirements could be negatively impacted.
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations discuss the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to accounts receivable, inventories, post retirement benefits, and income taxes. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

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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 recorded an allowance for doubtful accounts of $116,000 at June 30, 2010 and $113,000 at December 31, 2009. Management also records estimates for customer returns and deductions, discounts offered to customers, and for price adjustments. Should customer returns and deductions, discounts, and price adjustments fluctuate from the estimated amounts, additional allowances may be required. The Company has reduced accounts receivable for chargebacks by $639,000 at June 30, 2010 and $519,000 at December 31, 2009.
Inventories: Inventories, which include material, labor and manufacturing overhead, are valued at the lower of cost or market. The inventories are accounted for using the first-in, first-out (FIFO) method of determining inventory costs. Inventory quantities on-hand are regularly reviewed, and where necessary, provisions for excess and obsolete inventory are recorded based on historical and anticipated usage.
Goodwill and Long-Lived Assets: Management evaluates whether impairment exists for goodwill and long-lived assets annually on December 31 or at interim periods if an indicator of impairment exists. Should actual results differ from the assumptions used to determine impairment, additional provisions may be required. If there is a sustained downturn in the economy or the disruption of the financial and credit markets continues, demand for our products could fall below our current expectations and our forecasts of revenues and operating results could decline. Impairment charges of our goodwill or long-lived assets may be required in the future if our expected future cash flows decline. The Company has not recorded any impairment to goodwill or long-lived assets for the six months ended June 30, 2010 or the year ended December 31, 2009.
Self-Insurance: The Company is self-insured with respect to most of its Columbus and Batavia, Ohio and Gaffney, South Carolina medical and dental claims and Columbus and Batavia, Ohio workers’ compensation claims. The Company has recorded an estimated liability for self-insured medical and dental claims incurred but not reported and worker’s compensation claims incurred but not reported at June 30, 2010 and December 31, 2009 of $961,000 and $944,000, respectively.
Postretirement 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 10 of the Notes to Consolidated Financial Statements, which are contained in the 2009 Annual Report to Shareholders. Core Molding Technologies recorded a liability for postretirement healthcare benefits based on actuarially computed estimates of $18,992,000 at June 30, 2010 and $18,744,000 at December 31, 2009.
Revenue Recognition: Revenue from product sales is recognized at the time products are shipped and title transfers. Allowances for returned products and other credits are estimated and recorded as revenue is recognized. Tooling revenue is recognized when the customer approves the tool and accepts ownership. Progress billings and expenses are shown net as an asset or liability on the Company’s balance sheet. Tooling in progress can fluctuate significantly from period to period and is dependent upon the stage of tooling projects and the related billing and expense payment timetable for individual projects and therefore does not necessarily reflect projected income or loss from tooling projects. At June 30, 2010 the Company had a net liability related to tooling in progress of $907,000, which represents approximately $6,146,000 of progress tooling billings and $5,239,000 of progress tooling expenses. At December 31, 2009 the Company had a net liability related to tooling in progress of $485,000, which represents approximately $2,424,000 of progress tooling billings and $1,939,000 of progress tooling expenses.
Income taxes: The Consolidated Balance Sheet at June 30, 2010 and December 31, 2009, includes a deferred tax asset of $6,719,000 and $7,767,000, respectively. The Company performs analyses to evaluate the balance of deferred tax assets that will be realized. Such analyses are based on the premise that the Company is, and will continue to be, a going concern and that it is more likely than not that deferred tax benefits will be realized through the generation of future taxable income. For more information, refer to Note 9 in Core Molding Technologies 2009 Annual Report to Shareholders.

 

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Part I — Financial Information
Item 3
Quantitative and Qualitative Disclosures About Market Risk
Core Molding Technologies’ primary market risk results from changes in the price of commodities used in its manufacturing operations. Core Molding Technologies is also exposed to fluctuations in interest rates and foreign currency fluctuations associated with the Mexican Peso. Core Molding Technologies does not hold any material market risk sensitive instruments for trading purposes.
Core Molding Technologies has the following six items that are sensitive to market risks: (1) Industrial Revenue Bond (“IRB”) with a variable interest rate (although the Company has an interest rate swap to fix the interest rate at 4.89%); (2) Revolving Line of Credit and Mexican loan payable under the Credit Agreement, each of which bears a variable interest rate; (3) Capex loan payable with a variable interest rate (although the Company has an interest rate swap to fix the variable portion of the applicable interest rate at 2.3%) (4) bank Term loan under the Credit Agreement, with a variable interest rate (although the Company has an interest rate swap to fix the interest rate at 5.75%); (5) foreign currency purchases in which the Company purchases Mexican pesos with United States dollars to meet certain obligations that arise due to operations at the facility located in Mexico; and (6) raw material purchases in which Core Molding Technologies purchases various resins and fiberglass for use in production. The prices and availability of these materials are affected by the prices of crude oil and natural gas as well as processing capacity versus demand.
Assuming a hypothetical 10% increase in commodity prices, Core Molding Technologies would be impacted by an increase in raw material costs, which would have an adverse effect on operating margins.
Assuming a hypothetical 10% change in short-term interest rates would impact the Company in both 2010 and 2009. It would have impacted the interest paid on the Company’s Line of Credit and the Mexican loan payable. The interest rate on these loans is impacted by LIBOR. Although a 10% change in short-term interest rates would impact the interest paid by the Company, it would not have a material effect on earnings before tax.
A 10% change in future interest rate curves would significantly impact the fair value of the Company’s interest rate swaps.

 

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Part I — Financial Information
Item 4T
Controls and Procedures
As of the end of the period covered by this report, the Company has carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and its Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act). Based upon this evaluation, the Company’s management, including its Chief Executive Officer and its Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were (i) effective to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act was accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure, and (ii) effective to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms.
There were no changes in internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) that occurred in the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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Part II — Other Information
Item 1. Legal Proceedings
None
Item 1A. Risk Factors
There have been no material changes in Core Molding Technologies’ risk factors from those previously disclosed in Core Molding Technologies 2009 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Reserved
Item 5. Other Information
None
Item 6. Exhibits
See Index to Exhibits

 

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  CORE MOLDING TECHNOLOGIES, INC.
 
 
Date: August 13, 2010  By:   /s/ Kevin L. Barnett    
    Kevin L. Barnett   
    President, Chief Executive Officer, and Director   
 
     
Date: August 13, 2010  By:   /s/ Herman F. Dick, Jr.    
    Herman F. Dick, Jr.   
    Vice President, Secretary, Treasurer and Chief Financial Officer   

 

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INDEX TO EXHIBITS
         
Exhibit No.   Description   Location
 
       
2(a)(1)
  Asset Purchase Agreement Dated as of September 12, 1996, As amended October 31, 1996, between Navistar and RYMAC Mortgage Investment Corporation1   Incorporated by reference to Exhibit 2-A to Registration Statement on Form S-4 (Registration No. 333-15809)
 
       
2(a)(2)
  Second Amendment to Asset Purchase Agreement dated December 16, 19961   Incorporated by reference 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 dated as of November 1, 1996, between Core Molding Technologies, Inc. and RYMAC Mortgage Investment Corporation   Incorporated by reference to Exhibit 2-B to Registration Statement on Form S-4 (Registration No. 333-15809)
 
       
2(b)(2)
  First Amendment to Agreement and Plan of Merger dated as of December 27, 1996 Between Core Molding Technologies, Inc. and RYMAC Mortgage Investment Corporation   Incorporated by reference to Exhibit 2(b)(2) to Annual Report on Form 10-K for the year ended December 31, 2002
 
       
2(c)
  Asset Purchase Agreement dated as of October 10, 2001, between Core Molding Technologies, Inc. and Airshield Corporation   Incorporated by reference to Exhibit 1 to Form 8-K filed October 31, 2001
 
       
3(a)(1)
  Certificate of Incorporation of Core Molding Technologies, Inc. as filed with the Secretary of State of Delaware on October 8, 1996   Incorporated by reference to Exhibit 4(a) to Registration Statement on Form S-8 (Registration No. 333-29203)
 
       
3(a)(2)
  Certificate of Amendment of Certificate of Incorporation of Core Molding Technologies, Inc. as filed with the Secretary of State of Delaware on November 6, 1996   Incorporated by reference to Exhibit 4(b) to Registration Statement on Form S-8 (Registration No. 333-29203)
 
       
3(a)(3)
  Certificate of Amendment of Certificate of Incorporation as filed with the Secretary of State of Delaware on August 28, 2002   Incorporated by reference to Exhibit 3(a)(4) to Quarterly Report on Form 10-Q for the quarter ended September 30, 2002
 
       
3(a)(4)
  Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock as filed with the Secretary of State of Delaware on July 18, 2007   Incorporated by reference to Exhibit 3.1 to Form 8-k filed July 19, 2007
 
       
3(b)
  Amended and Restated By-Laws of Core Molding Technologies, Inc.   Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed January 4, 2008

 

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Exhibit No.   Description   Location
 
       
4(a)(1)
  Certificate of Incorporation of Core Molding Technologies, Inc. as filed with the Secretary of State of Delaware on October 8, 1996   Incorporated by reference to Exhibit 4(a) to Registration Statement on Form S-8 (Registration No. 333-29203)
 
       
4(a)(2)
  Certificate of Amendment of Certificate of Incorporation of Core Materials Corporation as filed with the Secretary of State of Delaware on November 6, 1996   Incorporated by reference to Exhibit 4(b) to Registration Statement on Form S-8 (Registration No. 333-29203)
 
       
4(a)(3)
  Certificate of Incorporation of Core Materials Corporation, reflecting amendments through November 6, 1996 [for purposes of compliance with Securities and Exchange Commission filing requirements only]   Incorporated by reference to Exhibit 4(c) to Registration Statement on Form S-8 (Registration No. 333-29203)
 
       
4(a)(4)
  Certificate of Amendment of Certificate of Incorporation as filed with the Secretary of State of Delaware on August 28, 2002   Incorporated by reference to Exhibit 3(a)(4) to Quarterly Report on Form 10-Q for the quarter ended September 30, 2002
 
       
4(a)(5)
  Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock as filed with the Secretary of State of Delaware on July 18, 2007   Incorporated by reference to Exhibit 3.1 to Form 8-K filed July 19, 2007
 
       
4(b)
  Stockholder Rights Agreement dated as of July 18, 2007, between Core Molding Technologies, Inc. and American Stock Transfer & Trust Company   Incorporated by reference to Exhibit 4.1 to Current Report From 8-k filed July 19, 2007
 
       
10(a)
  Fifth Amendment Agreement, dated May 11 2010, to the Credit Agreement dated December 9, 2008, among Core Molding Technologies, Inc., Core Composites de Mexico, S. De R.L. de C.V. and Keybank National Association.   Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed March 10, 2010
 
       
11
  Computation of Net Income per Share   Exhibit 11 omitted because the required information is Included in Notes to Financial Statement
 
       
31(a)
  Section 302 Certification by Kevin L. Barnett, President, Chief Executive Officer, and Director   Filed Herein
 
       
31(b)
  Section 302 Certification by Herman F. Dick, Jr., Vice President, Secretary, Treasurer, and Chief Financial Officer   Filed Herein
 
       
32(a)
  Certification of Kevin L. Barnett, Chief Executive Officer of Core Molding Technologies, Inc., dated August 13, 2010, pursuant to 18 U.S.C. Section 1350   Filed Herein
 
       
32(b)
  Certification of Herman F. Dick, Jr., Chief Financial Officer of Core Molding Technologies, Inc., dated August 13, 2010, pursuant to 18 U.S.C. Section 1350   Filed Herein
     
1  
The Asset Purchase Agreement, as filed with the Securities and Exchange Commission 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 Securities and Exchange Commission upon request.

 

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