CHICAGO RIVET & MACHINE CO quarterly report, Q3 FY2016

Chicago Rivet & Machine Co. — 2016 Q3 Form 10-Q Summary

Business Context and Reporting Period

Chicago Rivet & Machine Co. reported unaudited results for the three and nine months ended September 30, 2016. The company operates in two segments: fasteners, serving primarily the automotive industry, and assembly equipment, including automatic rivet-setting machines, parts and tools.

Financial Performance and Position

Metric	Q3 2016	Q3 2015	9M 2016	9M 2015
Net sales	$8.85 million	$9.02 million	$28.27 million	$27.51 million
Gross profit	$1.99 million	$1.91 million	$7.02 million	$6.25 million
Operating profit	$0.66 million	$0.62 million	$2.79 million	$2.12 million
Net income	$0.46 million	$0.42 million	$1.90 million	$1.46 million
Net income per share	$0.48	$0.44	$1.97	$1.51

Q3 gross margin was approximately 22.4%, versus 21.2% in the prior-year quarter; operating margin was approximately 7.5%, versus 6.8%; and net margin was approximately 5.2%, versus 4.7%.
Nine-month gross margin was approximately 24.8%, versus 22.7%; operating margin was approximately 9.9%, versus 7.7%; and net margin was approximately 6.7%, versus 5.3%.
Nine-month net cash provided by operating activities was $2.89 million, compared with $3.20 million in 2015. Capital expenditures were $1.78 million, compared with $1.34 million.
Cash and cash equivalents were $0.90 million at September 30, 2016. Certificates of deposit totaled $6.81 million, resulting in cash and near-cash balances of approximately $7.71 million.
Working capital was approximately $16.1 million, up about $0.4 million from year-end 2015. Total assets were $31.44 million and shareholders’ equity was $27.63 million.
The balance sheet reports no borrowings or other debt; total liabilities were $3.81 million, including $0.99 million of deferred income taxes.
Dividends declared were $0.18 per share in the third quarter and $0.79 per share for the first nine months, including an additional $0.25-per-share dividend in the first quarter.

Material Changes Versus Prior Comparable Period

Q3 sales declined 1.8%, while nine-month sales increased 2.8%.
Q3 net income increased 9.4%; nine-month net income increased 30.8%.
Fastener revenue declined 0.8% in Q3 but increased 2.3% year to date. Lower material costs increased Q3 fastener gross margin by 10.5% and increased nine-month fastener gross margin by 15.5%.
Assembly equipment revenue declined 11.6% in Q3 because fewer machines were shipped, although nine-month revenue increased 7.4%. Nine-month segment gross margin declined 4.4% because of product mix and higher labor and health insurance costs.
Selling and administrative expenses increased 2.2% in Q3 and 2.5% year to date, primarily from higher salaries, profit sharing, office supplies and computer-system expenditures, partly offset by lower commissions.
Capital spending increased substantially and included fastener equipment, assembly equipment, a building expansion at H&L Tool, and building and computer-system upgrades.

Outlook, Risks, Contingencies, and Unusual Items

Management stated that the automotive sector remained healthy, but domestic automotive sales appeared to have plateaued, making future fastener-segment growth more challenging.
Assembly equipment backlog was lower than the prior year, when demand was particularly strong.
Management believes cash, certificates of deposit and operating cash flow will adequately fund working-capital needs for the next twelve months.
Key risks include dependence on the domestic automotive industry, concentration of sales with two major customers, competition, raw-material price and availability, labor issues, product liability, warranty and recall claims, environmental costs, loss of key employees and failure to achieve expected cost savings.
The company is periodically involved in litigation, including environmental claims and contract disputes. Management does not expect currently unprovided liabilities to have a material adverse effect, although the ultimate amount cannot be established.
Federal tax returns for 2013–2015 and state tax returns for 2013–2015 remain subject to examination. Management does not anticipate a material impact.
The company early adopted ASU 2015-17, reclassifying $425,191 of current deferred tax assets as noncurrent deferred tax liabilities on the December 31, 2015 balance sheet.
Management stated that disclosure controls were effective and that no material changes occurred in internal control over financial reporting during the quarter.

Important Facts for Investors to Verify

Whether automotive demand remains stable and whether the apparent plateau in domestic vehicle sales affects future fastener revenue.
The sustainability of margin gains from favorable raw-material prices and the effect of future material-cost changes.
Assembly equipment shipments, backlog trends and the impact of product mix, labor and health-insurance costs.
Customer concentration, particularly exposure to the two major customers referenced by management.
Cash conversion and working-capital requirements, including the increase in accounts receivable and inventories.
Capital-spending plans, building-expansion costs and the company’s ability to maintain dividends while funding investments.
Potential effects of litigation, environmental claims, product liability matters and pending federal or state tax examinations.