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; 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; management's decision to pursue new products or businesses which involve additional costs, risks or capital expenditures; and other risks identified from time-to-time in Core Molding Technologies other public documents on file with the Securities and Exchange Commission, including those described in Item 1A of this Annual Report on Form 10-K.
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 of sheet molding compound ("SMC") in a closed mold process. The Batavia facility, which was leased in August 2005, 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 leased Matamoros facility utilizes spray-up and hand lay-up open mold processes and resin transfer ("RTM") closed mold process to produce reinforced plastic products. Core Molding Technologies also sells reinforced plastic products in the automotive-aftermarket industry.
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), construction, marine, and industrial applications. The Company's four major customers are International, Freightliner, LLC ("Freightliner"), PACCAR, Inc. ("PACCAR"), and Yamaha Motor Manufacturing Corporation ("Yamaha"), 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 suppliers, 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; (4) successful marketing of reinforced plastic products for the automotive and light truck aftermarkets, and (5) acquiring an existing molding business. The Company's efforts are currently directed towards all five areas.
MAJOR COMPETITORS
The Company believes that it is one of the four largest compounders and molders of reinforced plastics using the SMC, spray-up, hand-lay-up, VRIM and MIT 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, Continental Structural Plastics, Polywheels, Renee Composites, Camoplast and Goldshield. 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, Freightliner, PACCAR and Yamaha. The loss of a significant portion of sales to International, Freightliner, PACCAR, or Yamaha would have a material adverse effect on the business of the Company. In previous years the Company identified Lear Corporation as a major customer; however, in 2005 Lear was not considered a significant customer due to lower sales volumes.
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. The Company is in the process of negotiating a new long-term supply agreement to take effect when the current agreement expires.
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 51%, 54% and 55% of total sales for 2005, 2004 and 2003, respectively.
Relationship with Freightliner
As a result of the October 16, 2001, 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 13%, 12% and 11% of total sales for 2005, 2004 and 2003, respectively.
Relationship with PACCAR
As a result of the August 1, 2005, acquisition of Cincinnati Fiberglass Division of Diversified Glass, Inc., the Company increased its supply relationship with PACCAR. The Company produces roofs, backpanels, shrouds, and other components for PACCAR who uses such products on its heavy and medium duty trucks.
Sales to PACCAR amounted to approximately 12%, 4% and 3% of total sales for 2005, 2004, and 2003, 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, 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.
In the third quarter of 2005, the Company was informed by Yamaha of its intention to diversify its supplier base and as a result Yamaha may not continue to be a major customer in future reporting periods.
Sales to Yamaha amounted to approximately 8%, 12% and 15% of total sales for 2005, 2004 and 2003, respectively.
OTHER CUSTOMERS
The Company also produces products for other truck manufacturers, the automotive after-market industries and various other customers. In 2005, sales to these customers individually were all less than 10% of total annual 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 $19,170,000, $17,458,000 and $17,084,000 for the years ended 2005, 2004 and 2003, respectively. These export sales dollars represent approximately 15%, 16% and 18% of total sales for 2005, 2004 and 2003, respectively.
FOREIGN OPERATIONS
As a result of the Airshield Asset Acquisition, the Company began importing products into the United States as substantially all products produced in the Company's Mexican facility are sold to customers in the United States. The sales of products imported were approximately 19%, 18% and 20% of total sales in 2005, 2004 and 2003, respectively.
The Company owns long-lived assets totaling $989,000 at December 31, 2005 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 2005, 2004 and 2003.
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.
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 16 compression-molding presses in its Columbus, Ohio plant, which range in size from 500 to 4,500 tons. The Company also owns or leases 11 presses in its Gaffney, South Carolina plant, which range in size from 1,000 to 3,000 tons. As of December 31, 2005, the Company had two large tonnage presses in storage. It is the Company's intention to install these two presses in its Columbus, Ohio production facility. This is part of a 2006 expansion project to support two new product launches for existing customers that will go into production in 2007.
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.
Resin Transfer Molding (RTM) - 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 RTM process exhibit a high quality surface on both sides of the part and excellent part thickness. Multiple insert tooling (MIT) technique can be utilized in the RTM process to improve throughput based upon volume requirements.
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 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 seventeen separate spray-up cells in the Matamoros, Mexico facility that are capable of producing fiberglass-reinforced products with and without gelcoat surfaces. As a result of the Cincinnati Fiberglass acquisition, the Company also has a chain driven robotic gelcoating and spray up line at the Batavia, Ohio location. 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 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 $11.8 million and $10.4 million at December 31, 2005 and 2004, 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, however, based on 2006 customer requirement projections management believes extended shift and day schedules may be required.
See further discussion of machine and facility capacities at "Item 2 Properties" contained elsewhere in this Annual Report.
CAPITAL EXPENDITURES AND RESEARCH AND DEVELOPMENT
Capital expenditures totaled approximately $3.0 million, $1.3 million and $1.4 million for 2005, 2004 and 2003, respectively. Capital expenditures consist primarily of the purchase of production equipment to manufacture parts as well as storage racks, 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 $360,000 in 2005, $383,000 in 2004 and $251,000 in 2003.
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 hazardous and nonhazardous pollutants into the air and waterways. The Company has established and implemented 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. As part of the Company's environmental policy all employees are trained on waste management and other environmental issues. Through continual auditing the Company can ensure that all 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 2006.
EMPLOYEES
As of December 31, 2005, the Company employed a total of 1,377 employees, which consists of 793 employees in its United States operations and 584 employees in its Mexican operations. Of these 1,377 employees, 295 are covered by a collective bargaining agreement with the International Association of Machinists and Aerospace Workers ("IAM"), which extends to August 6, 2007, and 505 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 fluctuates on a cyclical and seasonal basis, causing a corresponding fluctuation for demand of the Company's products.
ITEM 1A. RISK FACTORS
The following risk factors describe various risks that may affect our business, financial condition and operations. References to "we," "us," and "our" in this "Risk Factors" section refer to Core Molding Technologies and its subsidiaries, unless otherwise specified or unless the context otherwise requires.
WE ARE DEPENDENT ON SALES TO A SMALL NUMBER OF OUR MAJOR CUSTOMERS.
Sales to International, Freightliner, PACCAR, and Yamaha constituted approximately 51%, 13%, 12% and 8%, respectively, of our 2005 net sales. No other customer accounted for more than 8% of our net sales for this period. The loss of any significant portion of sales to any of our major customers could have a material adverse effect on our business, results of operations or financial condition.
We are a standard supplier to each of our major customers, which results in recurring revenues. If we could not maintain our supplier relationship with any of our major customers it could have a material adverse effect on our business, results of operations or financial condition.
We are continuing to engage in efforts intended to improve and expand our relations with International, Freightliner, PACCAR, and Yamaha as well as provide support for our entire customer base. We have supported our position with customers through direct and active contact through our sales, quality, engineering and operational personnel. We cannot make any assurances that we will maintain or improve our customer relationships, whether these customers will continue to do business with us as they have in the past or whether we will be able to supply these customers or any of our other customers at current levels.
OUR BUSINESS IS AFFECTED BY THE CYCLICAL NATURE OF THE INDUSTRIES AND MARKETS THAT WE SERVE.
The heavy- and medium-duty truck industries are highly cyclical. These industries and markets fluctuate in response to factors that are beyond our control, such as general economic conditions, interest rates, federal and state regulations (including engine emissions regulations, tariffs, import regulations and other taxes), consumer spending, fuel costs and our customers' inventory levels and production rates. In addition, our operations are typically seasonal as a result of regular customer maintenance shutdowns, which typically occur in the third and fourth quarter of each calendar year. This seasonality may result in decreased net sales and profitability during the third and fourth fiscal quarters of each calendar year. Weakness in overall economic conditions or in the markets that we serve, or significant reductions by our customers in their inventory levels or future production rates, could result in decreased demand for our products and could have a material adverse effect on our business, results of operations or financial condition.
PRICE INCREASES IN RAW MATERIALS AND AVAILABILITY OF RAW MATERIALS COULD ADVERSELY AFFECT OUR OPERATING RESULTS AND FINANCIAL CONDITION.
Core Molding Technologies purchases resins and fiberglass for use in production as well as steel components for product assembly. The prices of resins are affected by the prices of crude oil and natural gas as well as processing capacity versus demand and the Company has incurred increases in raw material costs over the past few years. The Company attempts to reduce its exposure to increases by working with suppliers, evaluating new suppliers, improving material efficiencies, and sales price adjustments. If we are unsuccessful in developing ways to mitigate these raw material increases we may not be able to improve productivity or realize our ongoing cost reduction programs sufficiently to help offset the impact of these increased raw material costs. As a result, higher raw material costs could result in declining margins and operating results.
COST REDUCTION AND QUALITY IMPROVEMENT INITIATIVES BY ORIGINAL EQUIPMENT MANUFACTURERS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, RESULTS OF OPERATIONS OR FINANCIAL CONDITION.
We are primarily a components supplier to the heavy- and medium-duty truck industries, which are characterized by a small number of OEMs that are able to exert considerable pressure on components suppliers to reduce costs, improve quality and provide additional design and engineering capabilities. Given the fragmented nature of the industry, OEMs continue to demand and receive price reductions and measurable increases in quality through their use of competitive selection processes, rating programs and various other arrangements. We may be unable to generate sufficient production cost savings in the future to offset such price reductions. OEMs may also seek to save costs by relocating production to countries with lower cost structures, which could in turn lead them to purchase components from suppliers with lower production costs. Additionally, OEMs have generally required component suppliers to provide more design engineering input at earlier stages of the product development process, the costs of
which have, in some cases, been absorbed by the suppliers. Future price reductions, increased quality standards and additional engineering capabilities required by OEMs may reduce our profitability and have a material adverse effect on our business, results of operations or financial condition.
WE OPERATE IN HIGHLY COMPETITIVE MARKETS.
The markets in which we operate are highly competitive. We compete with a number of other manufacturers that produce and sell similar products. Our products primarily compete on the basis of capability, product quality, cost and delivery. Some of the Company's competitors have greater financial resources, research and development facilities, design engineering, manufacturing and marketing capabilities.
WE MAY BE SUBJECT TO ADDITIONAL SHIPPING EXPENSE OR LATE FEES IF WE ARE NOT ABLE TO MEET OUR CUSTOMERS' ON-TIME DEMAND FOR OUR PRODUCTS.
We must continue to meet our customers' demand for on-time deliver of our products. Factors that could result in our inability to meet customer demands include a failure by one or more of our suppliers to supply us with the raw materials and other resources that we need to operate our business effectively or poor management of our company or one or more of its' plants and an unforeseen spike in demand for our products, among other factors. If this occurs, we may be required to incur additional shipping expenses to ensure on-time delivery or otherwise be required to pay late fees, which could have a material adverse effect on our business, results of operations or financial condition.
IF WE FAIL TO RETAIN KEY PERSONNEL OUR BUSINESS COULD BE HARMED.
Our success largely depends on the efforts and abilities of key personnel within the company. Their skills, experience and industry contacts significantly benefit us. The inability to retain key personnel could have a material adverse effect on our business, results of operations or financial condition. Our future success will also depend in part upon our continuing ability to attract and retain highly qualified personnel.
WORK STOPPAGES OR OTHER LABOR ISSUES AT OUR FACILITIES OR AT OUR CUSTOMERS' FACILITIES COULD ADVERSELY AFFECT OUR OPERATIONS.
As of December 31, 2005, unions at our Columbus, Ohio and Matamoros, Mexico facilities represented approximately 58% of our entire workforce. As a result, we are subject to the risk of work stoppages and other labor relations matters. The current Columbus, Ohio and Matamoros, Mexico union contracts extend through August 8, 2007 and January 16, 2007, respectively. Any prolonged work stoppage or strike at either our Columbus, Ohio or Matamoros, Mexico unionized facilities could have a material adverse effect on our business, results of operations or financial condition. These collective bargaining agreements expire at various times. Any failure by us to reach a new agreement upon expiration of such union contracts may have a material adverse effect on our business, results of operations or financial condition.
In addition, if any of our customers or suppliers experiences a material work stoppage, that customer may halt or limit the purchase of our products or the supplier may interrupt supply of our necessary production components. This could cause us to shut down production facilities relating to these products, which could have a material adverse effect on our business, results of operations or financial condition
INCREASES IN ENERGY PRICES WILL INCREASE OUR OPERATING COSTS AND LIKELY REDUCE OUR PROFITABILITY.
We use energy to manufacture our products. Our operating costs increase if energy costs rise, which has occurred in 2005 due to higher oil and natural gas prices. During periods of higher energy costs, we may not be able to recover our operating cost increases through production efficiencies and price increases. While we may hedge our exposure to higher prices via future energy purchase contracts, increases in energy prices will increase our operating costs and likely reduce our profitability.
OUR BUSINESS IS SUBJECT TO RISKS ASSOCIATED WITH MANUFACTURING PROCESSES.
We convert raw materials into molded products through a manufacturing process at production facilities in Columbus, Ohio, Gaffney, South Carolina, Batavia, Ohio and Matamoros, Mexico. While we maintain insurance covering our manufacturing and production facilities, including business interruption insurance, a catastrophic loss of the use of all or a portion of our facilities due to accident, fire, explosion or natural disaster, whether short or long-term, could have a material adverse effect on the Company.
Unexpected failures of our equipment and machinery may result in production delays, revenue loss and significant repair costs, as well as injuries to our employees. Any interruption in production capability may require us to make large capital expenditures to remedy the situation, which could have a negative impact on our profitability and cash flows. Our business interruption insurance may not be sufficient to offset the lost revenues or increased costs that we may experience during a disruption of our operations. Because we supply our products to OEMs, a temporary or long-term business disruption could result in a permanent loss of customers. If this were to occur, our future sales levels and therefore our profitability could be materially adversely affected.
OUR INSURANCE COVERAGE MAY BE INADEQUATE TO PROTECT AGAINST THE POTENTIAL HAZARDS INCIDENT TO OUR BUSINESS.
We maintain property, business interruption, product liability and casualty insurance coverage, but such insurance may not provide adequate coverage against potential claims, including losses resulting from war risks, terrorist acts or product liability claims relating to products we manufacture. Consistent with market conditions in the insurance industry, premiums and deductibles for some of our insurance policies have been increasing and may continue to increase in the future. In some instances, some types of insurance may become available only for reduced amounts of coverage, if at all. In addition, there can be no assurance that our insurers would not challenge coverage for certain claims. If we were to incur a significant liability for which we were not fully insured or that our insurers disputed, it could have a material adverse effect on our financial position.
IN SEPTEMBER 2004, WE ACQUIRED THE ASSETS OF KEYSTONE RESTYLING PRODUCTS, A PRIVATELY HELD MANUFACTURER AND MARKETER FOR THE AUTOMOTIVE AFTERMARKET INDUSTRY. IN AUGUST 2005, WE ACQUIRED ASSETS OF THE CINCINNATI FIBERGLASS DIVISION OF DIVERSIFIED GLASS, A PRIVATELY HELD MANUFACTURER AND DISTRIBUTOR OF FIBERGLASS REINFORCED PLASTIC COMPONENTS SUPPLIED PRIMARILY TO THE HEAVY-DUTY TRUCK MARKET. WE MAY NOT REALIZE THE IMPROVED OPERATING RESULTS THAT WE ANTICIPATE FROM THESE ACQUISITIONS OR FROM ACQUISITIONS WE MAY MAKE IN THE FUTURE, AND WE MAY EXPERIENCE DIFFICULTIES IN INTEGRATING THE ACQUIRED BUSINESSES OR MAY INHERIT SIGNIFICANT LIABILITIES RELATED TO SUCH BUSINESSES.
We explore opportunities to acquire businesses that we believe are related to our core competencies from time to time, some of which may be material to us. We expect such acquisitions will produce operating results consistent with our other operations, however, we cannot provide assurance that this assumption will prove correct with respect to any acquisition.
Any acquisitions may present significant challenges for our management due to the increased time and resources required to properly integrate management, employees, information systems, accounting controls, personnel and administrative functions of the acquired business with those of Core Molding Technologies and to manage the combined company on a going forward basis. The diversion of management's attention and any delays or difficulties encountered in connection with the integration of these businesses could adversely impact our business, results of operations and liquidity, and the benefits we anticipate may never materialize.
IF WE ARE UNABLE TO MEET FUTURE CAPITAL REQUIREMENTS, OUR BUSINESS MAY BE ADVERSELY AFFECTED.
As we grow our business, we may have to incur significant capital expenditures. We may make capital investments to, among other things, upgrade our facilities, purchase leased facilities and equipment and enhance our production processes. Although we currently have cash reserves we cannot assure you that we will have, or be able to obtain, adequate funds to make all necessary capital expenditures when required, or that the amount of future capital expenditures will not be materially in excess of our anticipated or current expenditures. If we are unable to make necessary capital expenditures we may not have the capability to support our customer demands, which, in turn could reduce our sales and profitability and impair our ability to satisfy our customers' expectations. In addition, even if we are able to invest sufficient resources, these investments may not generate net sales that exceed our expenses, generate any net sales at all or result in any commercially acceptable products.
OUR PRODUCTS MAY BE RENDERED OBSOLETE OR LESS ATTRACTIVE IF THERE ARE CHANGES IN TECHNOLOGY, REGULATORY REQUIREMENTS OR COMPETITIVE PROCESSES.
Changes in technology, regulatory requirements and competitive processes may render certain products obsolete or less attractive. Our ability to anticipate changes in these areas will be a significant factor in our ability to remain competitive. If we are unable to identify or compensate for any one of these changes it may have a material adverse effect on our business, results of operations or financial condition.
OUR STOCK PRICE CAN BE VOLATILE.
Our stock price can fluctuate widely in response to a variety of factors. Factors include actual or anticipated variations in our quarterly operating results, our relatively small public float, changes in securities analysts' estimates of our future earnings, and the loss of major customers or significant business developments relating to us or our competitors, and other factors, including those described in this "Risk Factors" section. Our common stock also has a low average daily trading volume, which limits a person's
ability to quickly accumulate or quickly divest themselves of large blocks of our stock. In addition, a low average trading volume can lead to significant price swings even when a relatively few number of shares are being traded.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
