Chicago Rivet & Machine Co. 10-Q Summary
Business context and reporting period
Chicago Rivet & Machine Co. manufactures and sells rivets, cold-formed fasteners, screw-machine products, automatic rivet-setting machines, and related parts and tools. The company operates through Fastener and Assembly Equipment segments and serves primarily automotive and other industrial markets. This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Net sales | $8.568 million | $8.556 million | $26.789 million | $26.225 million |
| Gross profit | $1.120 million | $1.486 million | $4.423 million | $5.198 million |
| Gross margin | 13.1% | 17.4% | 16.5% | 19.8% |
| Operating profit | $4.608 million | $0.196 million | $5.351 million | $1.261 million |
| Net income | $3.579 million | $0.173 million | $4.180 million | $1.032 million |
| Net margin | 41.8% | 2.0% | 15.6% | 3.9% |
| Basic and diluted EPS | $3.71 | $0.18 | $4.33 | $1.07 |
Q3 and nine-month net income included a $4.738 million gain on the sale of the Naperville facility. Excluding this unusual gain, reported profitability was materially lower than the headline figures suggest. Selling and administrative expense was $1.250 million in Q3 and $3.810 million year to date, down 3.1% and 3.2%, respectively, from the comparable periods.
Operating cash flow was negative $0.413 million for the first nine months of 2022, compared with negative $0.467 million in 2021. Investing activities provided $4.342 million, principally from $5.038 million of property-sale proceeds, while capital expenditures were $0.696 million. Financing activities used $0.638 million for dividends. Cash and cash equivalents increased to $5.329 million from $2.037 million at December 31, 2021; cash, cash equivalents, and short-term investments totaled $8.070 million at September 30, 2022.
Working capital increased to $21.504 million from $17.422 million at year-end. The balance sheet reported total liabilities of $4.387 million and shareholders’ equity of $32.512 million. The filing does not report outstanding debt or borrowing arrangements. Accounts receivable were $6.578 million and inventories were $9.921 million, including a $0.636 million valuation reserve.
Material changes versus the prior comparable period
- Q3 sales increased 0.1%; nine-month sales increased 2.1%.
- Fastener revenue increased 3.3% in Q3 and 5.1% year to date, led by higher automotive sales. Fastener gross profit declined 18.5% in Q3 and 9.5% year to date.
- Assembly Equipment revenue declined 24.0% in Q3 and 18.1% year to date because of fewer machines sold, lower average selling prices, and the absence of several high-value specialty-machine sales recorded in 2021. Segment gross profit declined 49.2% in Q3 and 35.4% year to date.
- Gross margin contracted because historically high inflation increased raw-material, labor, and other operating costs. Management stated that cost increases have been difficult to recover.
- Accounts receivable increased $0.930 million and inventory increased $1.402 million from year-end, reflecting higher sales activity, raw-material prices, and inventory accumulation to mitigate supply disruptions.
- On September 27, 2022, the company sold its Naperville facility for $5.350 million in cash, less customary closing costs, recognizing a net gain of $4.738 million. It entered into a short-term lease for the facility, with monthly rent of $12,500 through December 31, 2022 and $8,500 from January 1 through June 30, 2023.
Guidance, outlook, risks, contingencies, and unusual items
Management provided no formal quantitative earnings or revenue guidance. It expects near-term challenges from inflation, supply-chain disruptions, automotive component shortages, a tight labor market, staffing constraints, and rising interest rates. Management plans to adjust activities to market conditions, optimize staffing, and pursue operating efficiencies. It believes available cash, cash equivalents, and operating cash flow will provide adequate working capital for the next twelve months.
Customer demand remained positive, but automotive production continued to be constrained by critical-component shortages. The company has credit concentration primarily in the automotive industry and the Midwestern United States. Other disclosed risks include customer concentration, competition, raw-material availability and pricing, export sales, labor relations, product liability, warranty and recall claims, environmental costs, information-system disruptions, loss of key employees, and difficulties achieving cost savings.
The company is periodically involved in litigation, including environmental claims and contract disputes; management believes unprovided liabilities will not materially affect financial condition. Federal tax returns for 2019 through 2021 and state returns for 2019 through 2021 remain subject to examination, but management does not expect material adjustments. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Reconcile reported earnings and EPS to the $4.738 million Naperville property-sale gain and assess recurring earnings without that item.
- Monitor gross-margin pressure from inflation, labor costs, supply constraints, and the company’s ability to recover cost increases through pricing.
- Evaluate the sustainability of negative operating cash flow despite reported net income and the effect of receivable and inventory growth on liquidity.
- Track automotive production, customer concentration, and component shortages, which materially affect Fastener segment demand.
- Confirm the company’s relocation plans and post-sale occupancy costs after the temporary Naperville lease expires in June 2023.
- Verify the absence of reported debt, the composition and maturity of short-term investments, and the continued capacity to fund dividends and capital expenditures.