Chicago Rivet & Machine Co. — 2021 Q3 Form 10-Q Summary
Business Context and Reporting Period
Unaudited results for the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods. The company manufactures and sells rivets, cold-formed fasteners, screw-machine products, automatic rivet-setting machines, and related parts and tools. Operations are reported in the Fastener and Assembly Equipment segments, with significant exposure to the automotive industry.
Key Financial Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net sales | $8.56 million | $7.65 million | $26.23 million | $19.33 million |
| Gross profit | $1.49 million | $1.64 million | $5.20 million | $3.02 million |
| Gross margin | 17.4% | 21.5% | 19.8% | 15.6% |
| Operating profit (loss) | $0.20 million | $0.38 million | $1.26 million | $(0.74) million |
| Net income (loss) | $0.17 million | $0.31 million | $1.03 million | $(0.41) million |
| Net income (loss) per share | $0.18 | $0.32 | $1.07 | $(0.43) |
- Q3 sales increased 11.9%; nine-month sales increased 35.7% and were 2.1% above the first nine months of 2019.
- Q3 operating margin declined to 2.3% from 5.0%, while nine-month operating margin improved to 4.8% from negative 3.8%.
- Q3 net margin was approximately 2.0% versus 4.0% in the prior-year quarter; nine-month net margin was approximately 3.9% versus negative 2.1%.
- Cash flow from operations was $(0.47) million for the first nine months of 2021, compared with $0.25 million provided in the prior-year period. The principal uses were increases in accounts receivable and inventories.
- Capital expenditures were $0.59 million, and dividends paid were $0.64 million during the first nine months.
- Cash and cash equivalents were $2.88 million at September 30, 2021. Certificates of deposit were $2.74 million, producing total cash and certificates of deposit of $5.62 million, compared with $7.30 million at December 31, 2020.
- Working capital was $17.30 million, up $0.73 million from year-end. Total assets were $32.63 million and shareholders’ equity was $29.10 million.
- The balance sheet presents no borrowings or debt financing; total liabilities were $3.53 million, including $2.61 million of current liabilities.
- Inventory increased to $7.75 million from $5.15 million at year-end, primarily because of higher raw-material prices and accelerated purchases.
Material Changes Versus the Prior Comparable Period
- Fastener revenue rose 7.5% in Q3 and 32.2% year to date. Q3 automotive fastener sales declined 8.6%, while non-automotive fastener sales increased 39.3%.
- Assembly Equipment revenue increased 61.6% in Q3 and 65.0% year to date, partly reflecting stronger demand and sales of more specialty machines.
- Q3 gross profit declined despite higher sales. Fastener segment gross margin fell to $1.20 million from $1.48 million, principally because steel prices increased approximately 34%, while labor and transportation costs also rose.
- Year-to-date gross profit improved to $5.20 million from $3.02 million because volume growth more than offset higher costs.
- Selling and administrative expenses increased 2.5% in Q3 and 4.7% year to date. Q3 growth was primarily attributable to IT consulting; year-to-date increases included commissions and profit-sharing expense.
- Other income declined to $43,744 year to date from $122,869, primarily because of lower interest income on certificates of deposit.
- Dividends declared were $0.22 per share in each quarter of 2021, versus $0.10 per share in the comparable 2020 quarters.
Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide formal quantitative earnings or revenue guidance. Management reported improving overall demand but noted that automotive customer production was affected by critical-component shortages and plant shutdowns. These shortages, supply constraints, longer lead times, elevated commodity prices, transportation costs, and labor shortages are expected to remain near-term challenges.
Management believes existing cash, cash equivalents, and operating cash flow will provide adequate working capital for the next twelve months. The company states that COVID-19-related uncertainty could continue to materially affect demand, operations, and financial condition, particularly through automotive exposure.
- Material risks include automotive-industry conditions, customer concentration, raw-material availability and pricing, supply-chain disruptions, labor issues, competition, export sales, product liability, warranty and recall claims, environmental costs, information-system disruptions, and dependence on key employees.
- The company is periodically involved in litigation, including environmental claims and contract disputes. Management does not expect currently unprovided contingencies to have a material adverse effect, although ultimate liabilities cannot be established at this time.
- Federal tax returns for 2018–2020 and state returns for 2018–2020 remain subject to examination. Management does not anticipate a material adjustment.
- Revenue of $36,301 was recognized in Q3 under progress-based assembly-equipment contracts; no such contracts remained outstanding at September 30, 2021.
- Disclosure controls and procedures were assessed as effective, and no material changes to internal control over financial reporting were reported.
Investor Verification Points
- Verify whether automotive production disruptions and component shortages continue to pressure orders and revenue mix.
- Monitor steel, transportation, labor, and other input costs, as Q3 margin compression demonstrates limited near-term cost recovery.
- Reconcile the negative operating cash flow with the substantial inventory build and assess inventory valuation reserves.
- Assess the sustainability of the $0.22-per-share quarterly dividend relative to operating cash generation and total liquidity.
- Review customer and automotive-industry concentration, as well as exposure to supply-chain, COVID-19, environmental, litigation, and tax contingencies.
- Confirm the absence of debt financing and track the composition and availability of the company’s cash and certificate-of-deposit balances.