Chicago Rivet & Machine Co. — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three and nine months ended September 30, 2020, filed November 6, 2020. The company manufactures and sells rivets, cold-formed fasteners, screw-machine products, automatic rivet-setting machines, and related parts and tools. Its markets are concentrated in the automotive industry and the Midwest. The company reports fastener and assembly equipment activities.
Financial Results and Key Metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net sales | $7.645 million | $8.189 million | $19.325 million | $25.686 million |
| Gross profit | $1.640 million | $1.650 million | $3.021 million | $4.860 million |
| Gross margin | 21.5% | 20.1% | 15.6% | 18.9% |
| Operating profit (loss) | $381,498 | $367,618 | $(737,682) | $927,990 |
| Operating margin | 5.0% | 4.5% | (3.8%) | 3.6% |
| Net income (loss) | $309,135 | $315,797 | $(413,813) | $832,198 |
| Net margin | 4.0% | 3.9% | (2.1%) | 3.2% |
| Basic and diluted EPS | $0.32 | $0.32 | $(0.43) | $0.86 |
- Operating cash flow for the first nine months was $251,809, compared with $2.001 million in the prior-year period.
- Capital expenditures were $375,657, down from $1.563 million. Cash dividends paid were $405,775, down from $927,487.
- Cash and cash equivalents were $997,831 at September 30, 2020. Certificates of deposit were $6.476 million, providing combined cash and certificates of deposit of approximately $7.5 million.
- Working capital was approximately $16.2 million. The filing reports no borrowings or debt obligations; total liabilities were $3.097 million, including $2.226 million of current liabilities and $871,084 of deferred taxes.
- Total assets were $31.435 million and shareholders’ equity was $28.338 million at September 30, 2020.
Material Changes Versus Prior Comparable Period
- Third-quarter sales declined 6.6%, while nine-month sales declined 24.8%, primarily because COVID-19 disrupted automotive demand and customer operations.
- Third-quarter sales improved 86.3% from the preceding quarter as automotive production resumed after second-quarter shutdowns.
- Fastener-related sales declined 3.9% in the third quarter and 23.9% year to date. Assembly equipment sales declined 29.6% in the quarter and 31.3% year to date; the prior-year comparison also benefited from certain high-dollar machine orders.
- Third-quarter gross profit was broadly stable, with gross margin improving to 21.5% from 20.1%, reflecting improved demand and cost savings. Nine-month gross margin fell to 15.6% from 18.9%.
- Selling and administrative expense decreased 1.8% in the quarter and 4.4% year to date, but increased to 19.4% of nine-month sales from 15.3% because sales fell faster than expenses. ERP-related consulting costs increased.
- The company recorded a nine-month loss compared with prior-year profit. The nine-month effective tax rate was approximately negative 32.7%, versus 22.5%, primarily reflecting CARES Act net operating loss carryback provisions.
- Cash and certificates of deposit declined from approximately $8.0 million at year-end 2019 to approximately $7.5 million at September 30, 2020. Retained earnings declined to $30.675 million from $31.495 million.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expects current cash, certificates of deposit, and operating cash flow to provide adequate working capital for the next twelve months, but provided no quantitative revenue or earnings guidance.
- Management reported improved demand after government restrictions were relaxed, while emphasizing that the duration and economic effects of COVID-19 remain uncertain and could be material and prolonged.
- To conserve capital, the company reduced work schedules, delayed capital expenditures, reduced the quarterly dividend from $0.22 to $0.10 per share beginning in the second quarter, and implemented other cost-saving measures.
- Key risks include dependence on the automotive industry and major customers, COVID-19 effects, competition, raw-material pricing and availability, supply-chain disruptions, labor issues, export exposure, product liability and warranty claims, environmental costs, information-system disruptions, key-person dependence, and execution of cost savings.
- The company is involved from time to time in litigation, including environmental claims and contract disputes. Management believes unprovided liabilities will not have a material adverse effect, although the ultimate amount cannot be determined.
- Federal tax returns for 2017–2019 and state returns for 2017–2019 remain subject to examination. Management does not expect a material effect from examinations.
- Management stated that disclosure controls were effective and that no material changes occurred in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the third-quarter recovery in automotive demand continues amid potential COVID-19 restrictions and economic weakness.
- The company’s ability to restore positive operating cash flow after the significant year-to-date decline.
- Whether reduced dividends and capital expenditures are temporary or indicate a longer-term change in capital allocation.
- Customer concentration, automotive exposure, backlog, and the timing of assembly equipment orders.
- The sustainability of cost reductions and the effect of ERP implementation costs on future operating expenses.
- Potential tax benefits from CARES Act loss carrybacks and the status of open federal and state tax examinations.
- The filing’s segment revenue tables should be reviewed directly because the extracted text presents inconsistent segment column labeling relative to the MD&A descriptions.