Chicago Rivet & Machine Co. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing is an annual report; selected fourth-quarter segment results are also disclosed. The company manufactures fasteners and assembly equipment, with primary exposure to the North American automotive industry. It had 228 employees, no foreign operations, and approximately 12% of sales to foreign customers.
Financial performance and liquidity
- Net sales: $37.17 million, up 3.9% from $35.76 million in 2017 and the highest level since 2007.
- Net income: $2.00 million, or $2.07 per share, versus $2.08 million, or $2.15 per share, in 2017. Net margin was approximately 5.4%, compared with approximately 5.8% in 2017.
- Fastener segment: Full-year revenue was $33.71 million, up 5.4%. Gross margin was $6.83 million, up from $6.63 million. Non-automotive sales increased 21.7%, more than offsetting a 1.4% decline in automotive sales.
- Assembly equipment segment: Full-year revenue was $3.46 million, down 8.6%. Lower sales of high-dollar specialty machines reduced segment gross margin by $203,523 from 2017, despite an increase in the number of machines shipped.
- Fourth quarter: Fastener revenue increased 2.1% to $7.82 million, while fastener gross margin declined $120,056 to $1.47 million. Assembly equipment revenue declined 12.9% to $697,489.
- Operating expenses: Selling and administrative expense declined 0.8% to $5.50 million, or 14.8% of sales versus 15.5% in 2017. The comparison benefited from the completion of an ERP conversion in 2017.
- Other income and taxes: Other income increased to $153,537 from $100,901, primarily due to higher interest income. The effective tax rate increased to 21.7% from 15.7%; 2017 included a one-time $432,000 tax benefit from the Tax Cuts and Jobs Act deferred-tax remeasurement.
- Capital expenditures: $2.02 million, compared with $1.34 million in 2017. Depreciation expense was $1.31 million.
- Liquidity: Working capital was approximately $17.4 million at year-end, up approximately $0.4 million. Cash, cash equivalents and certificates of deposit totaled $7.8 million, down $1.2 million, primarily due to higher inventories and capital expenditures.
- Debt and financing: The filing does not identify material debt or debt-financed activities. The only 2018 financing activity described was approximately $1.1 million of dividend payments. No off-balance-sheet financing arrangements were in place.
- Cash flow: The filing states that operating cash flow and existing liquidity should be sufficient for the next twelve months, but the supplied text does not provide a clear operating cash flow or free cash flow figure.
Material changes versus 2017
- Revenue increased $1.41 million, but net income declined $77,897 because higher steel and other raw-material costs constrained gross margins.
- Fastener growth, particularly from non-automotive customers, more than offset weaker automotive sales and lower assembly equipment revenue.
- Selling and administrative expenses improved following the prior-year ERP implementation costs.
- Cash declined as the company accelerated raw-material purchases ahead of anticipated price increases and increased capital spending.
- The company paid $1.14 per share in 2018, including a $0.30 per-share special dividend. The board declared a $0.22 regular quarterly dividend and an additional $0.30 special dividend payable in March 2019.
Outlook, risks and unusual items
- Management expects a cautious 2019 outlook for the fastener segment because early activity and industry forecasts indicate near-term weakness in automotive demand.
- Assembly equipment demand and backlog were described as generally consistent with the prior year, although product mix may continue to affect revenue.
- Tariffs contributed to higher raw-material prices and negatively affected 2018 earnings; management could not determine whether prices would ease in 2019 even if tariffs were removed.
- Management expects a more challenging operating environment from higher interest rates, a slowing domestic economy and the mature vehicle-production cycle. It plans to pursue operational efficiencies, new customers and additional equipment and facility investments.
- Key risks include dependence on the cyclical domestic automotive industry, intense global competition, concentration among major customers, steel-price volatility, tariffs and trade policy, labor disruptions at customers, product liability and warranty claims, environmental liabilities, cybersecurity and information-system failures, and retention of key personnel.
- Three customers represented approximately 37% of 2018 consolidated revenue: TI Group Automotive Systems, LLC at approximately 17%, and Parker-Hannifin Corporation and Cooper-Standard Holdings Inc. at approximately 10% each.
- Ordinary-course litigation, including environmental claims, was disclosed; management believes unreserved liabilities will not materially affect financial position. No material unresolved SEC comments or material control deficiencies were reported.
Investor verification points
- Verify the consolidated balance sheet, debt balances, operating cash flow and free cash flow in the incorporated 2018 Annual Report financial statements.
- Assess whether steel, tariff and other input-cost pressures continue to compress fastener-segment gross margins.
- Monitor automotive production, customer concentration and the sustainability of non-automotive fastener growth.
- Review assembly equipment backlog, shipment mix and the effect of specialty-machine sales on segment revenue and margins.
- Confirm the cash impact of the March 2019 regular and special dividends and planned capital expenditures.
- Consider the limited trading liquidity of the common stock; average 2018 daily volume was fewer than 2,000 shares.