Chicago Rivet & Machine Co. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three and nine months ended September 30, 2014, filed November 7, 2014. The company operates in two segments: fasteners, including cold-formed parts, rivets and screw-machine products; and assembly equipment, including automatic rivet-setting machines, parts and tools. Sales are concentrated primarily in the automotive industry and the Midwest.
Financial Results and Key Metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Net sales | $9.0 million | $9.5 million | $28.4 million | $27.9 million |
| Gross profit | $2.1 million | $2.5 million | $6.6 million | $6.8 million |
| Gross margin | 23.2% | 26.7% | 23.1% | 24.2% |
| Operating profit | $0.8 million | $1.1 million | $2.5 million | $2.7 million |
| Operating margin | 8.4% | 12.0% | 8.6% | 9.6% |
| Net income | $0.5 million | $0.8 million | $1.7 million | $1.9 million |
| Net margin | 6.0% | 8.7% | 5.9% | 6.8% |
| EPS | $0.56 | $0.85 | $1.74 | $1.98 |
- Q3 fastener revenue was $8.3 million, down 3.9%; nine-month revenue was $26.1 million, up 3.0%.
- Q3 assembly equipment revenue was $0.7 million, down 15.7%; nine-month revenue was $2.3 million, down 8.7%, primarily because fewer machines were shipped.
- Nine-month operating cash flow was $2.2 million, compared with $2.4 million in the prior year.
- Nine-month capital expenditures were $1.3 million, primarily for fastener-segment equipment, versus $2.8 million in 2013.
- Cash and cash equivalents were $0.9 million at September 30, 2014. Certificates of deposit were $5.8 million, resulting in approximately $6.7 million of cash and short-term investments.
- Working capital was approximately $15.8 million. Total current liabilities were $3.0 million; the filing reports no debt balances.
- Dividends paid during the first nine months were $0.9 million, including regular quarterly dividends and a $0.40 per-share extra dividend.
Material Changes Versus the Prior Comparable Period
- Q3 sales declined 4.9%, although nine-month sales increased 1.9%.
- Profitability declined because of lower quarterly sales, less favorable product mix and higher production costs. Fastener gross margin decreased by $0.4 million in Q3 and by $44,000 for the nine-month period.
- Production costs increased, including depreciation, tooling, labor and employee health insurance. Q3 depreciation increased approximately $41,000 and health insurance costs increased approximately $43,000.
- Q3 selling and administrative expense decreased 4.7%, primarily because of lower profit-sharing expense; nine-month expense increased 1.2% due mainly to higher commissions and professional fees.
- Other income decreased materially because 2013 included larger gains on equipment disposals.
- Retained earnings increased to $28.0 million from $27.2 million at year-end 2013, after $1.7 million of net income and $0.9 million of dividends.
Guidance, Outlook, Risks and Unusual Items
Management provided no quantitative earnings or revenue guidance. Management stated that low interest rates, improved consumer confidence and lower fuel prices were favorable for the automotive market and that the company remained positioned to produce positive future results. Management also emphasized profitable revenue growth and continued cost control.
- Results may not be indicative of the full year because the business is typically stronger in the first half, and Q3 2013 was unusually strong.
- Key risks include domestic automotive-industry conditions, intense competition, concentration of sales with two major customers, raw-material availability and pricing, labor issues, product liability, warranty and 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 unprovided liabilities will not have a material adverse effect, but the ultimate amounts are not determinable.
- Federal tax returns for 2011–2013 remain subject to IRS examination. Management does not expect a material adjustment.
- The company is evaluating the effect of new revenue-recognition guidance, effective for periods beginning after December 15, 2016; the filing does not provide an estimated impact.
- Management concluded that disclosure controls were effective, and reported no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the decline in Q3 fastener margins is temporary or reflects sustained increases in labor, health-care, tooling and depreciation costs.
- The timing and volume of assembly-equipment machine shipments and whether that segment can recover from its nine-month revenue decline.
- Customer concentration, automotive-industry exposure and the financial condition of the two major customers.
- Cash deployment, including the sustainability of the extra dividend and the company’s capital-expenditure requirements.
- Potential outcomes of litigation, environmental matters, tax examinations and adoption of the new revenue-recognition standard.