Business Context and Reporting Period
Chicago Rivet & Machine Co. filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2020. 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 two segments: fasteners and assembly equipment. Sales are concentrated in the automotive industry and the U.S. Midwest.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 |
|---|---|---|---|---|
| Net sales | $4.1 million | $8.9 million | $11.7 million | $17.5 million |
| Gross profit | $0.1 million | $1.5 million | $1.4 million | $3.2 million |
| Gross margin | 1.7% | 17.4% | 11.8% | 18.3% |
| Operating profit (loss) | $(1.1) million | $0.2 million | $(1.1) million | $0.6 million |
| Operating margin | (27.9)% | 2.7% | (9.6)% | 3.2% |
| Net income (loss) | $(0.8) million | $0.2 million | $(0.7) million | $0.5 million |
| Net margin | (19.0)% | 2.6% | (6.2)% | 3.0% |
| Loss per share | $(0.81) | $0.24 | $(0.75) | $0.54 |
- Fastener revenue was $3.5 million in the second quarter and $10.3 million year to date, representing declines of 55.0% and 33.4%, respectively.
- Assembly equipment revenue was $0.6 million in the second quarter and $1.4 million year to date, down 44.3% and 32.0%, respectively.
- Net cash provided by operating activities was $0.6 million for the first half of 2020, compared with $0.7 million in the prior-year period.
- Capital expenditures were $0.3 million, down from $1.3 million in the first half of 2019. Cash dividends paid were $0.3 million, compared with $0.7 million in the prior-year period.
- Cash and cash equivalents were $1.3 million at June 30, 2020. Certificates of deposit were $6.8 million, producing combined cash, cash equivalents, and certificates of deposit of approximately $8.1 million.
- Total current assets were $17.2 million versus $18.0 million at December 31, 2019; current liabilities were $1.4 million versus $1.6 million. Management reported working capital of approximately $15.8 million.
- Total assets were $30.4 million and total shareholders’ equity was $28.1 million at June 30, 2020. The balance sheet presents no borrowings or other debt obligations.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales declined $4.8 million, or 53.8%, while first-half sales declined $5.8 million, or 33.2%.
- Automotive fastener sales fell 67.7% in the second quarter and 37.6% for the first six months, reflecting the temporary idling of much of the automotive industry.
- Non-automotive fastener sales also declined 34.1% in the quarter and 26.5% year to date.
- Fastener segment gross margin decreased by $1.3 million in the quarter and $1.5 million year to date. Assembly equipment gross margin declined to $0.1 million from $0.3 million in the quarter and to $0.3 million from $0.7 million year to date.
- Selling and administrative expenses decreased 7.1% in the quarter and 5.6% year to date, primarily from lower commissions, salaries, and outside services. These savings were insufficient to offset the revenue decline.
- Quarterly dividends were reduced from $0.22 to $0.10 per share. The first-half dividend declared was $0.32 per share versus $0.74 in the prior-year period.
- Accounts receivable decreased approximately $1.1 million from year-end, consistent with lower sales. Retained earnings declined to $30.5 million from $31.5 million after the first-half net loss and dividends.
Outlook, Risks, Contingencies, and Unusual Items
- COVID-19-related government closures and restrictions materially reduced demand, particularly from automotive customers, and adversely affected the company, its customers, and suppliers. Management reported improved demand after restrictions were relaxed but stated that the timing and breadth of economic recovery remain uncertain.
- Management reduced staffing and work schedules, delayed capital expenditures, reduced dividends, and pursued other expense controls to conserve cash. Management believes available cash, certificates of deposit, and operating cash flow will provide adequate working capital for the next twelve months.
- The CARES Act enabled potential net operating loss carrybacks and contributed to effective tax rates of approximately (29.2)% for the quarter and (29.7)% for the first half, compared with 21.0% and 21.6% in the comparable 2019 periods.
- Risks include continued COVID-19 effects, dependence on the domestic automotive industry and major customers, competition, raw-material availability and pricing, supply-chain disruptions, labor issues, export exposure, product liability and recall claims, environmental liabilities, information-system disruptions, key-person risk, and execution of cost savings.
- The company is periodically involved in litigation, including environmental claims and contract disputes. Management believes unprovided contingencies are not expected to have a material adverse effect, although the ultimate liabilities cannot presently be determined.
- Federal tax returns for 2016 through 2019 remain subject to IRS examination, and state returns for those years remain subject to examination by various state authorities. Management does not expect a material adjustment.
- The filing provides no formal quantitative revenue or earnings guidance. Management cautions that interim results are not necessarily indicative of full-year results.
Investor Verification Checklist
- Verify the pace and durability of automotive production recovery and related fastener demand after June 30, 2020.
- Assess whether the company can restore gross margins and operating profitability at reduced or normalized sales volumes.
- Review customer concentration, receivable collections, inventory reserves, and exposure to automotive and Midwest markets.
- Confirm liquidity and investment availability, including the maturity and terms of the $6.8 million in certificates of deposit.
- Monitor dividend sustainability, capital expenditure requirements, and the effect of continued cash conservation.
- Evaluate potential COVID-19-related shutdowns, supply-chain constraints, labor disruptions, litigation, environmental claims, and tax examination outcomes.