Chicago Rivet & Machine Co. 2017 Form 10-K Summary
Business Context and Reporting Period
The filing covers the fiscal year ended December 31, 2017. Chicago Rivet operates in two segments: fasteners, including rivets, cold-formed fasteners, parts and screw-machine products; and assembly equipment, including automatic riveting and assembly machinery, parts and tools. Its principal market is the North American automotive industry. The Company had 219 employees, no foreign operations, and approximately 12% of sales to foreign customers.
Financial Performance and Key Metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net sales | $35.765 million | $37.022 million | Down 3.4% |
| Net income | $2.079 million | $2.357 million | Down 11.8% |
| Diluted earnings per share | $2.15 | $2.44 | Down $0.29 |
| Fastener segment revenue | $31.978 million | $33.127 million | Down 3.5% |
| Assembly equipment revenue | $3.787 million | $3.896 million | Down 2.8% |
| Selling and administrative expense | $5.549 million | $5.559 million | Down 0.2% |
| Effective tax rate | 15.7% | 33.6% | Down 17.9 percentage points |
Calculated net profit margin was approximately 5.8% in 2017 versus 6.4% in 2016. Fastener segment gross margin declined by $1.128 million for the year because of higher quality-related expenses and less favorable raw-material pricing. Assembly equipment margins were relatively unchanged for the full year due to cost controls, despite lower sales.
Other income increased to $100,901 from $65,255, primarily because of higher interest income and larger investments in certificates of deposit. The Tax Cuts and Jobs Act produced a one-time fourth-quarter net tax benefit of approximately $432,000 from remeasurement of deferred tax assets and liabilities.
Working capital was approximately $17 million at year-end, up approximately $0.6 million. Cash, cash equivalents and certificates of deposit totaled approximately $9 million, also up approximately $0.6 million. Capital expenditures were $1.338 million, compared with $2.028 million in 2016, and depreciation expense was $1.232 million versus $1.242 million. The filing does not provide a clear total operating cash flow value in the supplied text.
Investing activity consisted primarily of capital expenditures. Financing activity consisted of approximately $1.1 million of dividend payments. The filing does not provide a clear debt balance or identify material borrowing arrangements. The Company reported no off-balance-sheet financing arrangements and believes available cash and operating cash flow will support working capital needs for the next twelve months.
Material Changes Versus the Prior Comparable Period
- Consolidated sales declined 3.4%, reflecting lower automotive activity and reduced shipments of rivet-setting machines.
- Domestic automobile and light-truck sales declined approximately 2% during 2017, negatively affecting the fastener segment.
- Fastener segment gross margin decreased materially because of quality costs and reversal of favorable 2016 raw-material pricing.
- Assembly equipment fourth-quarter revenue declined 21.4%, primarily because fewer rivet-setting machines were shipped; full-year revenue declined 2.8%.
- Selling and administrative expense was essentially flat. Lower profit-sharing and payroll costs were largely offset by approximately $167,000 of new ERP implementation costs.
- The effective tax rate fell substantially, principally because of the December 2017 tax law change and the related $432,000 deferred-tax benefit.
- Capital spending decreased approximately $0.690 million from 2016, while cash and certificates of deposit increased.
Dividends, Outlook, Risks and Unusual Items
The Company paid regular dividends totaling $0.80 per share and an additional $0.35 per share during 2017, for total 2017 distributions of $1.15 per share. In February 2018, the Board declared a regular quarterly dividend of $0.21 per share and an additional $0.30 per share dividend, both payable March 20, 2018.
Management began 2018 with a more cautious outlook. U.S. automobile and light-truck sales were expected to decline further, creating pressure on fastener revenue. Higher steel and other raw-material costs, including additional increases in early 2018, may be difficult to pass through to customers. The assembly equipment segment entered 2018 with a lower machine backlog than a year earlier. Management plans to improve operating efficiency, develop non-automotive customers and expand customer relationships.
Key risks include dependence on the cyclical domestic automotive industry; intense domestic and international competition; customer concentration; tariffs, trade policy and foreign exchange exposure; steel and other raw-material costs; labor disruptions at customers or suppliers; product liability, warranty and recall claims; environmental liabilities; and dependence on key personnel. TI Group Automotive Systems, LLC represented approximately 19% of consolidated revenue in both 2017 and 2016. The filing states that litigation and environmental matters were not expected to have a material adverse effect, although ultimate contingent liabilities cannot be established with certainty.
Management reported effective disclosure controls and effective internal control over financial reporting as of December 31, 2017. No material changes in internal control were reported during the fourth quarter.
Important Facts for Investors to Verify
- Reconcile the reported $2.079 million net income with the approximately $432,000 one-time tax benefit and assess normalized earnings.
- Review the consolidated statements of cash flows for operating cash flow, free cash flow and year-end cash composition.
- Confirm total debt, lease obligations and other liabilities in the full financial statements and notes, since the supplied filing text does not state a clear debt balance.
- Evaluate the effect of automotive production trends, customer concentration and the loss or reduction of major customer programs.
- Assess whether higher steel and other input costs can be recovered through pricing.
- Review the assembly equipment order backlog and machine shipments for 2018.
- Consider dividend sustainability relative to operating cash flow, capital expenditures and the Company’s cyclical automotive exposure.