Business Context and Reporting Period
Chicago Rivet & Machine Co. manufactures and sells rivets, cold-formed fasteners, screw machine products, automatic rivet-setting machines, and related parts and tools. The company operates through Fastener and Assembly Equipment segments, with significant exposure to the automotive industry.
This unaudited Form 10-Q covers the three and six months ended June 30, 2021, compared with the corresponding 2020 periods. The filing was signed August 11, 2021. There were 966,132 common shares outstanding as of August 9, 2021.
Financial Performance and Position
| Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 |
|---|---|---|---|---|
| Net sales | $8.364 million | $4.104 million | $17.669 million | $11.680 million |
| Gross profit | $1.677 million | $0.070 million | $3.712 million | $1.381 million |
| Operating profit (loss) | $0.392 million | $(1.144) million | $1.065 million | $(1.119) million |
| Net income (loss) | $0.320 million | $(0.780) million | $0.860 million | $(0.723) million |
| Basic and diluted EPS | $0.33 | $(0.81) | $0.89 | $(0.75) |
- Calculated gross margins were approximately 20.0% in Q2 2021 and 21.0% for the first six months, compared with approximately 1.7% and 11.8%, respectively, in the prior-year periods.
- Calculated operating margins were approximately 4.7% in Q2 2021 and 6.0% year to date, compared with negative margins in the 2020 periods.
- Selling and administrative expenses increased 5.8% in the quarter and 5.9% year to date, but declined to 15.0% of first-half sales from 21.4% in the prior-year period.
- Fastener sales increased 103.3% in Q2 and 49.2% year to date. Assembly Equipment sales increased 107.3% and 66.5%, respectively.
- Cash, cash equivalents, and certificates of deposit totaled $6.230 million at June 30, 2021, compared with $7.301 million at December 31, 2020. Cash and cash equivalents alone were $4.236 million, versus $2.568 million at year-end.
- Working capital was $17.260 million, up $0.694 million from the beginning of the year. Total current assets were $19.602 million and current liabilities were $2.342 million.
- The filing does not report outstanding debt; total liabilities were $3.281 million, including $0.939 million of deferred income taxes. Shareholders’ equity was $29.141 million.
Cash Flow, Capital Allocation, and Liquidity
- First-half operating cash flow was negative $0.300 million, compared with positive $0.643 million in 2020. The principal uses included a $1.903 million increase in inventories and a $0.747 million increase in accounts receivable.
- Investing activities provided $2.394 million, primarily from net certificate-of-deposit maturities. Capital expenditures were $0.345 million, mainly for fastener-production equipment.
- Financing activities used $0.425 million for dividends paid. Dividends declared were $0.22 per share in each quarter, or $0.44 per share for the first half, compared with $0.32 per share in the prior-year period.
- Management states that current cash, cash equivalents, and operating cash flow are expected to provide adequate working capital for the next twelve months.
Material Changes Versus the Prior Comparable Period
- Results benefited substantially from the comparison with Q2 2020, when COVID-19-related shutdowns severely reduced automotive and other demand. First-half 2021 sales increased 51.3% year over year and were slightly above first-half 2019 sales of $17.497 million.
- Automotive fastener sales increased 159.3% in Q2 and 52.7% year to date; non-automotive fastener sales increased 57.6% and 44.8%, respectively.
- Fastener gross margin improved to $1.262 million in Q2 from negative $0.040 million and to $2.918 million year to date from $1.052 million. Assembly Equipment gross margin increased to $0.415 million in Q2 from $0.110 million and to $0.793 million year to date from $0.329 million.
- Inventory increased 36.9% from year-end, driven primarily by accelerated raw-material purchases in anticipation of price increases and supply-chain disruptions. Raw materials increased to $3.390 million from $2.246 million.
- The effective tax rate was approximately 21.4% in Q2 and 21.6% year to date, compared with tax benefits and negative effective rates in 2020, partly reflecting the CARES Act net operating loss carryback provisions.
Outlook, Risks, Contingencies, and Unusual Items
- Management reports improved demand and a better economic outlook as COVID-19 restrictions eased, but identifies continuing labor shortages, supply-chain disruptions, longer lead times, higher commodity prices, and higher labor costs.
- Some automobile manufacturers reduced operations during the quarter because of shortages of critical components, negatively affecting demand from certain automotive customers. Management expects these challenges and COVID-19 uncertainties to continue in the near term.
- Assembly Equipment contracts generated $422,578 of revenue during Q2; $36,301 of remaining performance obligations was expected to be recognized in Q3 2021.
- The company has customer and credit-risk concentration in the automotive industry and the Midwestern United States, as well as concentration among major customers and exposure to export markets.
- The company is periodically involved in litigation, including environmental claims and contract disputes. Management believes unprovided liabilities are not expected to materially affect financial position, although the ultimate amounts cannot currently be established.
- Federal tax returns for 2017–2020 and state tax returns for 2017–2020 remain subject to examination. Management does not anticipate a material adjustment.
- Principal disclosed risks include automotive-industry conditions, competition, raw-material availability and pricing, labor issues, product liability and warranty claims, environmental costs, information-system disruptions, key-person risk, and difficulty achieving cost savings.
- Management concluded that disclosure controls were effective and that no material changes occurred in internal control over financial reporting during the quarter.
Investor Verification Checklist
- Verify whether the post-pandemic sales recovery is sustainable relative to the unusually weak 2020 comparison and first-half 2019 baseline.
- Monitor automotive production, semiconductor and other component shortages, customer concentration, and the effect on Fastener segment demand.
- Assess whether commodity inflation, labor shortages, and supply-chain disruptions will compress margins or require additional inventory investment.
- Reconcile negative first-half operating cash flow with reported earnings and track inventory and receivables conversion.
- Confirm the company’s continuing ability to fund capital expenditures and dividends without debt financing or materially reducing cash and certificates of deposit.
- Review the annual report for detailed customer concentrations, legal and environmental matters, tax contingencies, and risk factors not repeated in this interim filing.