Chicago Rivet & Machine Co. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited results for the three months ended March 31, 2017, compared with the first quarter of 2016. The company operates in two segments: fasteners, including rivets, cold-formed fasteners and screw-machine products; and assembly equipment, including automatic rivet-setting machines, parts and tools. The automotive industry is the primary market for the fastener segment.
Financial Performance and Position
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $9.483 million | $9.596 million | Down 1.2% |
| Gross profit | $2.257 million | $2.429 million | Down 7.1% |
| Gross margin | 23.8% | 25.3% | Down 1.5 percentage points |
| Operating profit | $0.750 million | $0.970 million | Down 22.6% |
| Operating margin | 7.9% | 10.1% | Down 2.2 percentage points |
| Net income | $0.511 million | $0.647 million | Down 21.0% |
| Net margin | 5.4% | 6.7% | Down 1.3 percentage points |
| Diluted earnings per share | $0.53 | $0.67 | Down $0.14 |
- Fastener revenue increased 3.4% to $8.736 million, despite lower U.S. automotive and light-truck sales.
- Assembly equipment revenue declined 35.0% to $0.747 million because fewer machines were shipped than in the strong first quarter of 2016.
- Cash flow from operations was negative $0.141 million, compared with positive $0.678 million in the prior-year quarter. Working-capital investment included increases of $0.850 million in accounts receivable and $0.750 million in inventories.
- Capital expenditures were $0.175 million, compared with $0.597 million in Q1 2016. Net cash provided by investing activities was $1.070 million, primarily reflecting certificate-of-deposit activity.
- Cash and cash equivalents were $0.752 million at March 31, 2017, and certificates of deposit were $6.814 million, for total cash and certificates of deposit of approximately $7.6 million.
- Working capital was approximately $16.6 million. Total current liabilities were $2.860 million against current assets of $19.418 million.
- Total liabilities were $3.871 million and shareholders’ equity was $27.871 million. The filing does not identify outstanding debt balances or borrowings.
- The company paid $0.55 per share in dividends during the quarter, consisting of a regular $0.20 dividend and an additional $0.35 dividend related to strong 2016 operating results.
Material Changes, Outlook, Risks and Unusual Items
- Lower sales and an unfavorable product mix reduced gross margins. Fastener production costs were generally comparable with the prior year, but tooling expense increased by approximately $52,000 due primarily to new parts.
- Selling and administrative expenses rose 3.3% to $1.506 million. A new enterprise resource planning system contributed to the increase; approximately $77,000 was spent on the project during the quarter, which management expected to complete before year-end.
- Management expects current cash, certificates of deposit and operating cash flow to provide adequate working capital for the next twelve months.
- Management cited recent increases in certain raw-material costs that could adversely affect future results if sustained. The company plans to emphasize cost controls and operating efficiencies.
- Management stated that its financial condition supports pursuing opportunities to grow revenue and improve net income, but provided no quantitative earnings or revenue guidance.
- Key risks include dependence on the domestic automotive industry, concentration of sales with two major customers, competition, raw-material pricing and availability, labor issues, export risks, product liability and warranty or recall claims, environmental costs, key-employee retention and the ability to achieve cost savings.
- The company is involved from time to time in litigation, including environmental claims and contract disputes. Management believes unprovided liabilities will not materially affect financial position, although the ultimate amounts cannot be established.
- Federal tax returns for 2013 through 2016 and state tax returns for 2013 through 2016 remain subject to examination. Management does not expect a material impact from potential adjustments.
- The company does not expect the forthcoming revenue-recognition standard to have a material impact, does not plan to adopt it early and had not determined its transition method as of the filing.
Investor Verification Checklist
- Verify whether the sharp decline in assembly equipment shipments was temporary and whether machine sales recovered in subsequent quarters.
- Monitor fastener demand, automotive production trends and customer concentration, including the two major customers.
- Assess whether raw-material and tooling-cost increases continue to pressure gross margins.
- Track completion costs and expected benefits from the ERP implementation.
- Reconcile operating cash flow with reported earnings and monitor receivables and inventory growth.
- Confirm the company’s cash and certificate-of-deposit balances, dividend capacity and any future borrowing or capital-allocation decisions.
- Review subsequent filings for developments in litigation, environmental matters, tax examinations and adoption of the new revenue-recognition standard.