Business Context and Reporting Period
Chicago Rivet & Machine Co. filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2018. The company manufactures and sells rivets, cold-formed fasteners, screw-machine products, automatic rivet-setting machines, and related parts and tools. Its two reportable segments are fasteners and assembly equipment, with substantial exposure to the automotive industry.
Key Financial Metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net sales | $8.86 million | $8.39 million | $28.66 million | $27.31 million |
| Gross profit | $1.63 million | $1.75 million | $6.27 million | $6.08 million |
| Operating profit | $0.33 million | $0.48 million | $2.08 million | $1.88 million |
| Net income | $0.29 million | $0.34 million | $1.70 million | $1.31 million |
| Net income per share | $0.30 | $0.35 | $1.76 | $1.36 |
- Q3 gross margin was approximately 18.5%, versus 20.9% in the prior-year quarter. Nine-month gross margin was approximately 21.9%, versus 22.3%.
- Q3 operating margin was approximately 3.7%, versus 5.7%; nine-month operating margin was approximately 7.3%, versus 6.9%.
- Q3 net margin was approximately 3.2%, versus 4.0%; nine-month net margin was approximately 5.9%, versus 4.8%.
- Net cash provided by operating activities was $1.44 million for the first nine months, compared with $1.64 million in 2017.
- Capital expenditures were $1.64 million, compared with $1.07 million in 2017. Dividends paid were $0.90 million.
- At September 30, 2018, cash and cash equivalents were $1.08 million and certificates of deposit were $6.81 million, or approximately $7.90 million combined. Working capital was approximately $17.3 million.
- Total assets were $33.43 million and shareholders’ equity was $29.66 million. No borrowings or debt are reported on the condensed balance sheet.
Material Changes Versus the Prior Comparable Period
- Q3 sales increased 5.6%, while nine-month sales increased 5.0%.
- Fastener revenue increased 6.0% in Q3 and 6.5% year to date. Automotive sales increased 2.1% in Q3 and 0.6% year to date; non-automotive sales increased 14.8% and 20.4%, respectively.
- Assembly equipment revenue increased 2.1% in Q3 but declined 7.4% year to date, reflecting fewer high-dollar machine shipments.
- Q3 net income declined 14.3% despite higher sales, primarily because of increased steel prices and approximately $202,000 of additional tooling expense in the fastener segment.
- Nine-month net income increased 29.8%, aided by higher sales, lower selling and administrative expenses, and a lower effective tax rate.
- Effective tax rates declined to 20.9% in Q3 and 22.4% year to date, versus 32.9% and 32.6%, respectively, due primarily to the Tax Cuts and Jobs Act. Management estimated a $168,000 reduction in year-to-date tax expense.
- Accounts receivable increased approximately $1.2 million from year-end, and net inventories increased approximately $0.7 million, contributing to operating cash flow pressure.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management provided no formal quantitative earnings or revenue guidance. It expects higher steel prices to remain a near-term concern and stated that further increases are expected. Because some customers expect prices to remain fixed over multi-year product lives, the company may have difficulty recovering raw-material costs. Management plans to seek customer price relief and improve operating efficiency.
- Demand for fastener products benefited from the domestic automotive market and new non-automotive customers, although North American light-vehicle production declined versus the prior year.
- Key risks include automotive-industry conditions, customer concentration, competition, export exposure, raw-material prices and availability, labor-market pressures, product liability and warranty or recall claims, environmental costs, loss of key employees, and failure to achieve expected cost savings.
- The company is involved from time to time in litigation, including environmental claims and contract disputes. Management believes unreserved liabilities will not have a material adverse effect, although the ultimate amount cannot currently be determined.
- The company adopted ASC Topic 606 using the modified retrospective method on January 1, 2018. The adoption had no material impact and no cumulative adjustment to retained earnings.
- The company’s 2015–2017 federal tax returns remain subject to IRS examination, but management does not anticipate a material adjustment.
- Adoption of the new lease standard, ASC Topic 842, is not expected to have a significant impact based on current lease arrangements.
- Management concluded that disclosure controls were effective and reported no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Whether steel prices, tooling costs, and labor expenses continue to compress fastener-segment margins.
- Whether the company can obtain customer price increases sufficient to recover higher material costs.
- The sustainability of the $7.9 million cash and certificate-of-deposit balance after capital expenditures, dividends, and working-capital needs.
- Whether assembly equipment sales recover, particularly high-dollar machine orders.
- The extent of revenue and receivable concentration in the automotive industry and with major customers.
- Potential outcomes of pending or future litigation, environmental matters, warranty claims, and tax examinations.
- Whether the lower 2018 tax rate remains representative after the Tax Cuts and Jobs Act effects are fully reflected.