Business Context and Reporting Period
Chicago Rivet & Machine Co. filed this unaudited Form 10-Q for the three months ended March 31, 2020. The company manufactures and sells fasteners, rivets, screw-machine products, automatic rivet-setting equipment, and related parts and tools. It operates through fastener and assembly equipment segments, with significant exposure to the automotive industry.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $7.576 million | $8.622 million |
| Gross profit | $1.310 million | $1.662 million |
| Gross margin | 17.3% | 19.3% |
| Operating profit | $25,000 | $319,000 |
| Operating margin | 0.3% | 3.7% |
| Net income | $57,000 | $287,000 |
| Net margin | 0.7% | 3.3% |
| Basic and diluted EPS | $0.06 | $0.30 |
| Net cash used in operating activities | $490,000 | $680,000 |
| Capital expenditures | $167,000 | $906,000 |
- Fastener revenue was $6.737 million, down 11.1% year over year; assembly equipment revenue was $839,000, down 19.5%.
- Cash and cash equivalents were $1.058 million at March 31, 2020. Certificates of deposit totaled $6.076 million, resulting in cash and certificates of deposit of approximately $7.1 million.
- Working capital was approximately $16.4 million. Total current assets were $18.302 million and current liabilities were $1.885 million.
- Total liabilities were $2.805 million, consisting primarily of current liabilities and $919,000 of deferred income taxes. The filing does not report debt borrowings.
- Total assets were $31.807 million and shareholders’ equity was $29.002 million at March 31, 2020.
- The company declared and paid a regular quarterly dividend of $0.22 per share, or approximately $213,000 in total.
Material Changes Versus the Prior Comparable Period
- Net sales declined $1.045 million, or 12.1%, primarily because of reduced demand related to COVID-19, particularly from automotive customers.
- Automotive sales declined 6.5% to $4.414 million, while non-automotive sales declined 18.8% to $2.324 million within the fastener segment.
- Gross profit decreased $351,000, and gross margin contracted by approximately 200 basis points as fixed production costs were spread over lower sales volumes.
- Operating profit fell $294,000, or approximately 92%, despite a 4.3% reduction in selling and administrative expenses. Selling and administrative expenses increased to 17.0% of sales from 15.6%.
- Net income decreased $230,000, or approximately 80%, and EPS declined from $0.30 to $0.06.
- Cash and certificates of deposit declined from approximately $8.0 million at December 31, 2019 to approximately $7.1 million at March 31, 2020. The company generated negative operating cash flow and paid dividends, partially offset by certificate-of-deposit activity.
- Capital expenditures were substantially lower than in the prior-year quarter, declining from $906,000 to $167,000.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management provided no specific revenue or earnings guidance. It stated that current cash, cash equivalents, and operating cash flow are expected to provide adequate working capital for the next twelve months.
- COVID-19 adversely affected the company, customers, and suppliers. Operations continued at a significantly reduced level because some customers were classified as essential businesses, while personnel and operating activity were reduced to support safety and social-distancing measures.
- Management could not predict the duration or scope of the pandemic or its effects on automotive demand, business operations, results, or financial condition, and warned that the impact could be material and extended.
- Key ongoing risks include automotive-industry conditions, customer concentration, competition, export exposure, raw-material availability and pricing, supply-chain disruptions, labor issues, product liability and warranty or recall claims, environmental costs, information-system disruptions, key-person risk, and difficulty achieving cost savings.
- The company is involved from time to time in litigation, including environmental claims and contract disputes. Management stated that unreserved liabilities are not expected to have a material adverse effect, although the ultimate amounts cannot currently be established.
- Federal tax returns for 2016 through 2019 and state returns for 2016 through 2019 remain subject to examination. Management does not anticipate a material adjustment.
- Management reported that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether COVID-19-related production restrictions and automotive demand weakness persisted beyond March 31, 2020 and materially affected subsequent-quarter revenue and margins.
- Customer concentration, particularly exposure to major automotive customers and the Midwest manufacturing region.
- The sustainability of cash resources and dividend payments given negative operating cash flow in the quarter and reduced operating activity.
- Accounts receivable growth of approximately $894,000 during the quarter and the adequacy of the $155,000 allowance for doubtful accounts.
- Inventory valuation reserves, which increased to $487,000 from $457,000 at year-end, and potential write-down risk if demand remains weak.
- Potential effects of litigation, environmental matters, tax examinations, supply-chain disruptions, and product liability or recall claims.