Business Context and Reporting Period
Chicago Rivet & Machine Co. filed an unaudited Form 10-Q for the three months ended March 31, 2019. The company manufactures and sells fasteners, screw-machine products, rivet-setting machines, parts, and related tools. Operations are reported in two segments: Fastener and Assembly Equipment.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $8.62 million | $10.01 million | Down 13.9% |
| Gross profit | $1.66 million | $2.34 million | Down 29.1% |
| Gross margin | 19.3% | 23.4% | Down 4.1 percentage points |
| Operating profit | $319,000 | $878,000 | Down 63.7% |
| Operating margin | 3.7% | 8.8% | Down 5.1 percentage points |
| Net income | $287,000 | $708,000 | Down 59.5% |
| Net margin | 3.3% | 7.1% | Down 3.7 percentage points |
| Diluted EPS | $0.30 | $0.73 | Down $0.43 |
| Operating cash flow | $(680,000) | $215,000 | Declined $895,000 |
| Capital expenditures | $906,000 | $225,000 | Increased $681,000 |
At March 31, 2019, cash and cash equivalents were $606,000, certificates of deposit were $5.08 million, and total cash, cash equivalents, and certificates of deposit were approximately $5.7 million. Working capital was approximately $16.7 million. Total assets were $32.8 million and shareholders’ equity was $29.5 million. The filing reports no debt obligations; total liabilities were $3.3 million, including $945,000 of deferred income taxes.
The company paid $502,000 in cash dividends, consisting of a regular quarterly dividend of $0.22 per share and an additional dividend of $0.30 per share related to 2018 operating results. The dividend declared per share was $0.52, compared with $0.51 in the prior-year quarter.
Material Changes Versus the Prior Comparable Period
- Fastener segment sales fell 15.1% to $7.58 million, primarily because of reduced automotive demand. Automotive sales declined $1.33 million, including declines of 21.5% in the United States and 24.3% in foreign markets.
- Assembly Equipment sales declined 4.0% to $1.04 million, primarily because Q1 2018 included a high-dollar machine order. Management characterized underlying demand and machine backlog as relatively stable.
- Fastener segment gross margin declined from $1.98 million to $1.33 million. Steel prices averaged approximately 15% higher year over year, partly due to tariffs instituted in 2018.
- Selling and administrative expenses declined 8.3% to $1.34 million, mainly because of lower profit-sharing expense and sales commissions. These expenses nevertheless increased as a percentage of sales to 15.6% from 14.6%.
- Inventory increased $732,000 during the quarter as the company accelerated raw-material purchases ahead of expected price increases and delivery delays. Accounts receivable increased $425,000.
- Cash, cash equivalents, and certificates of deposit declined approximately $2.1 million from year-end, reflecting capital expenditures, dividends, operating cash use, and working-capital investment.
Outlook, Commentary, Risks, and Unusual Items
Management described first-quarter results as disappointing and attributed the downturn primarily to weaker automotive activity. It expects continued pressure from steel and other material prices and stated that further increases remain a concern. Management plans to emphasize cost controls, operating efficiencies, and new sales opportunities.
The Assembly Equipment segment had relatively stable demand and backlog, contrasting with weakness in the Fastener segment. Management believes existing cash, cash equivalents, and operating cash flow will provide adequate working capital for the next twelve months.
The company adopted lease accounting under ASU 2016-02, Topic 842, on January 1, 2019. The adoption had no material impact on the financial statements. The company is exposed to automotive-industry concentration, customer concentration, export-market risks, raw-material price and availability risks, competition, labor issues, product liability, warranty and recall claims, environmental costs, information-system disruptions, key-person risk, and challenges in achieving cost savings.
The company is involved from time to time in litigation, including environmental claims and contract disputes, but management does not expect unreserved liabilities to have a material adverse effect. Federal tax returns for 2015 through 2018 remain subject to IRS examination; management does not expect a material adjustment. Disclosure controls were reported effective, with no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Whether automotive production and customer demand recover, particularly in the United States and China.
- Whether steel prices, tariffs, and other input costs continue to compress fastener-segment margins.
- Whether operating cash flow returns to positive levels after the quarter’s inventory build and capital spending.
- The sustainability of the company’s dividend policy given first-quarter net income of $287,000 versus $502,000 of dividends paid.
- Whether the Assembly Equipment segment’s stable backlog offsets continued weakness in fasteners.
- Potential exposure from customer concentration, export sales, litigation, environmental matters, and pending tax examinations.