Chicago Rivet & Machine Co. — Q2 2017 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and six months ended June 30, 2017, filed August 8, 2017. The company operates in two segments: fasteners and assembly equipment. Its fastener business primarily serves the automotive industry, with significant exposure to domestic automotive production and two major customers.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $9.44 million | $9.82 million | $18.92 million | $19.42 million |
| Gross profit | $2.07 million | $2.61 million | $4.33 million | $5.04 million |
| Gross margin | 21.9% | 26.6% | 22.9% | 26.0% |
| Operating profit | $0.65 million | $1.16 million | $1.40 million | $2.13 million |
| Net income | $0.46 million | $0.80 million | $0.97 million | $1.44 million |
| Net margin | 4.9% | 8.1% | 5.1% | 7.4% |
| Basic and diluted EPS | $0.48 | $0.82 | $1.01 | $1.49 |
- Net cash provided by operating activities was $0.81 million for the first six months, down from $1.63 million in the prior-year period.
- Capital expenditures were $0.80 million, primarily for production equipment. Cash dividends paid were $0.72 million, including regular quarterly dividends and a $0.35-per-share extra dividend paid in the first quarter.
- Cash and cash equivalents were $0.89 million at June 30, 2017, compared with $0.35 million at December 31, 2016. Certificates of deposit were $6.81 million versus $8.06 million, leaving cash and certificates of deposit of approximately $7.71 million.
- Working capital was approximately $16.5 million and was relatively unchanged from year-end. Total assets were $31.77 million and shareholders’ equity was $28.14 million.
- The balance sheet does not present outstanding bank debt or other debt financing. Total liabilities were $3.62 million, including $2.64 million of current liabilities and $0.98 million of deferred income taxes.
Material changes versus the prior comparable period
- Second-quarter sales declined 3.9%; first-half sales declined 2.6%.
- Fastener sales declined 8.6% in the second quarter and 2.7% for the first half, primarily because of reduced shipments to certain large automotive customers. Fastener segment operating profit declined to $0.76 million in the quarter from $1.49 million.
- Assembly equipment sales increased 39.0% in the second quarter because of shipments of several high-value machine orders, but first-half sales declined 1.3%. First-half segment gross margin increased modestly.
- Fastener margins were pressured by lower volume and increased tooling expense of approximately $122,000 in the quarter and $174,000 for the first half, largely related to new parts.
- Selling and administrative expense decreased 2.0% in the quarter but increased 0.6% for the first half. ERP system conversion costs added approximately $75,000 in the quarter and $150,000 for the first half.
- Management characterized certain expenses as non-recurring, including ERP conversion costs. The project was expected to be completed before year-end, with related expenses expected to decline in the second half.
Guidance, outlook, risks, contingencies, and unusual items
Management does not expect overall business conditions in the second half of 2017 to be materially different from the first half. It expects to emphasize cost control and operating efficiency while pursuing profitable revenue growth. No quantitative earnings or sales guidance was provided.
- Management cited declining domestic vehicle sales and increased automotive incentives as concerns. Results remain dependent on automotive industry activity.
- Other identified risks include intense competition, customer concentration, raw-material price and availability, labor relations, product liability, warranty and recall claims, environmental compliance costs, loss of key employees, and difficulty achieving cost savings.
- The company is subject to ordinary-course litigation, including environmental claims and contract disputes. Management believes unprovided liabilities will not materially affect financial position, although the ultimate amounts are not determinable from the filing.
- Federal tax returns for 2013 through 2016 remain subject to IRS examination, and state returns for 2013 through 2016 remain subject to examination by state authorities. Management does not expect a material adjustment.
- The company has a concentration of credit risk among customers primarily in the automotive industry and the Midwestern United States.
- The company preliminarily expects the pending revenue recognition standard, ASC 606, to have no material financial statement impact other than expanded disclosures. It had not selected a transition method and did not plan to early adopt.
- Management reported that disclosure controls were effective and that no material changes occurred in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether automotive demand and shipments to major customers continue to weaken in the second half of 2017.
- Whether fastener gross margins recover after the volume decline and elevated tooling costs.
- The remaining cost and completion timing of the ERP system conversion.
- Whether operating cash flow improves relative to the $0.81 million generated in the first half.
- The sustainability of dividend payments, including the first-quarter extra dividend, relative to earnings and cash generation.
- Potential developments in disclosed litigation, tax examinations, customer concentration, and environmental or product-liability exposures.