Chicago Rivet & Machine Co. — 2015 Q3 Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and nine months ended September 30, 2015, filed November 6, 2015. The company operates through two segments: fasteners, including cold-formed parts, rivets and screw-machine products; and assembly equipment, including automatic rivet-setting machines, parts and tools. Sales are concentrated in the automotive industry and primarily in the Midwest.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net sales | $9.018 million | $8.996 million | $27.508 million | $28.447 million |
| Gross profit | $1.911 million | $2.086 million | $6.252 million | $6.589 million |
| Operating profit | $0.616 million | $0.759 million | $2.123 million | $2.468 million |
| Net income | $0.422 million | $0.541 million | $1.456 million | $1.678 million |
| Diluted EPS | $0.44 | $0.56 | $1.51 | $1.74 |
- Q3 gross margin was approximately 21.2%, operating margin 6.8% and net margin 4.7%. Nine-month margins were approximately 22.7%, 7.7% and 5.3%, respectively.
- Q3 operating cash flow was not separately disclosed; nine-month operating cash flow was $3.205 million, compared with $2.228 million in the prior-year period.
- Nine-month capital expenditures were $1.339 million, compared with $1.329 million in 2014. Dividends paid were $0.763 million, including regular quarterly dividends and an additional $0.25-per-share dividend paid in the first quarter.
- At September 30, 2015, cash and cash equivalents were $1.081 million and certificates of deposit were $6.316 million, for combined balances of approximately $7.4 million. Working capital was approximately $16.2 million.
- Total assets were $30.372 million and shareholders’ equity was $26.434 million. The filing presents no interest-bearing debt balance.
- Current liabilities were $2.869 million versus current assets of $19.118 million. The company reported adequate liquidity to fund working capital and the Madison Heights expansion for the next twelve months.
Material changes versus the prior comparable period
- Q3 sales increased 0.2%, but nine-month sales declined 3.3%. Fastener sales fell 1.7% in Q3 and 5.0% year to date, while assembly equipment sales increased 23.6% in Q3 and 16.5% year to date.
- Fastener segment gross profit declined $0.257 million in Q3 and $0.553 million year to date. Lower sales and higher production payroll and employee-insurance costs more than offset savings in tooling and supplies.
- Assembly equipment segment margins improved by approximately $0.099 million in Q3 and $0.217 million year to date, primarily because of higher machine shipments and stronger tools and parts sales.
- Q3 operating profit declined 18.8% and net income declined 21.9%. Nine-month operating profit declined 14.0% and net income declined 13.2%.
- Selling and administrative expense decreased 2.5% in Q3 but increased 0.2% year to date. As a percentage of nine-month sales, it rose to 15.0% from 14.5%.
- Sales to a China location of a certain automotive customer declined approximately $288,000 in Q3 and approximately $592,000 year to date, accounting for a significant portion of the fastener sales decline.
- Cash, cash equivalents and certificates of deposit increased approximately $1.1 million from year-end, while inventories declined from $5.162 million to $4.864 million.
Guidance, outlook, risks, contingencies and unusual items
- No formal financial guidance was provided. Management stated that automotive market conditions remained favorable but foreign shipments, particularly to China, were below the prior year and demand in the fastener segment remained uneven.
- Management plans to continue cost controls and operational adjustments while investing to remain competitive. The company began a $1.503 million expansion of its fastener facility in Madison Heights, Michigan, to add capacity and improve workflow.
- The company has significant exposure to the domestic automotive industry and concentration of sales to two major customers. Other cited risks include competition, raw-material pricing and availability, labor issues, product liability, warranty and recall claims, environmental costs, loss of key employees and failure to achieve cost savings.
- The company is involved from time to time in litigation, including environmental claims and contract disputes. Management believes unprovided contingent liabilities will not materially affect financial position, although the ultimate amounts cannot be established.
- Federal tax returns for 2012 through 2014 and state returns for 2012 through 2014 remain subject to examination. Management does not expect a material adjustment from these examinations.
- Effective tax rates were 32.8% in Q3 2015 and 32.5% for the first nine months, with the Domestic Production Activities Deduction contributing to rates below the federal statutory rate.
Important facts for investors to verify
- Whether weakness in fastener demand, especially China-related automotive shipments, persists or broadens.
- Progress, final cost and expected returns from the $1.503 million Madison Heights facility expansion.
- Whether production payroll, employee-insurance and other overhead costs normalize relative to sales.
- Customer concentration, automotive-sector exposure and the effect of any changes in major-customer production or sourcing.
- Cash generation and capital allocation, including dividends, certificates of deposit and future capital expenditures.
- Potential developments in litigation, environmental matters, product liability claims and tax examinations.
- The filing states that disclosure controls were effective and that no material changes occurred in internal control over financial reporting during the quarter.