Chicago Rivet & Machine Co. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three and six months ended June 30, 2019, compared with the corresponding 2018 periods. The company manufactures and sells fasteners, screw-machine products, automatic rivet-setting machines, and related parts and tools. Operations are reported in two segments: Fastener and Assembly Equipment.
Financial Performance and Position
| Metric | Q2 2019 | Q2 2018 | Six Months 2019 | Six Months 2018 |
|---|---|---|---|---|
| Net sales | $8.875 million | $9.793 million | $17.497 million | $19.804 million |
| Gross profit | $1.548 million | $2.288 million | $3.210 million | $4.631 million |
| Gross margin | 17.4% | 23.4% | 18.3% | 23.4% |
| Operating profit | $0.241 million | $0.876 million | $0.560 million | $1.755 million |
| Operating margin | 2.7% | 9.0% | 3.2% | 8.9% |
| Net income | $0.230 million | $0.703 million | $0.516 million | $1.411 million |
| Net margin | 2.6% | 7.2% | 3.0% | 7.1% |
| Basic and diluted EPS | $0.24 | $0.73 | $0.54 | $1.46 |
- Six-month net cash provided by operating activities was $0.710 million, versus $0.701 million in the prior-year period.
- Capital expenditures were $1.284 million in the cash flow statement, primarily for production equipment; reported segment capital expenditures totaled $1.293 million.
- Cash dividends paid were $0.715 million; dividends declared were $0.74 per share for the first half, versus $0.72 in 2018.
- At June 30, 2019, cash and cash equivalents were $0.908 million and certificates of deposit were $5.578 million, for combined cash resources of approximately $6.486 million.
- Total assets were $32.758 million and shareholders’ equity was $29.561 million. Total liabilities were $3.196 million, consisting primarily of current liabilities and deferred taxes; the filing does not disclose a balance for interest-bearing debt.
- Working capital was approximately $16.7 million, down approximately $0.7 million from year-end. Management stated that cash, cash equivalents, and operating cash flow should provide adequate working capital for the next twelve months.
Material Changes Versus the Prior Comparable Period
- Q2 sales declined 9.4%; first-half sales declined 11.7%, primarily because of reduced Fastener demand, particularly from automotive customers.
- Fastener revenue fell 13.5% in Q2 and 14.3% year to date. Automotive Fastener sales declined 16.5% in Q2 and 19.4% year to date.
- Assembly Equipment revenue increased 39.6% in Q2 and 13.9% year to date, largely due to the timing of high-value machine orders.
- Fastener segment gross margin declined by $0.828 million in Q2 and $1.480 million year to date. Steel prices averaged approximately 12% higher in the first half, primarily due to tariffs, while labor costs also increased.
- Selling and administrative expense declined 7.5% in Q2 and 7.9% year to date, primarily because of lower profit-sharing and sales-commission expenses. However, first-half selling and administrative expense increased to 15.1% of sales from 14.5%.
- Other income increased to $0.098 million year to date from $0.071 million, primarily from higher interest income on certificates of deposit.
- Cash, cash equivalents, and certificates of deposit declined approximately $1.3 million from year-end, mainly reflecting capital expenditures and dividends, partially offset by operating and investing cash flows.
Outlook, Risks, Contingencies, and Unusual Items
- Management described second-quarter results as disappointing and attributed weakness to a global downturn in automotive activity, lower vehicle sales, and changing consumer preferences.
- Management plans to emphasize cost controls, operating efficiencies, and new sales opportunities. Assembly Equipment demand and backlog were described as relatively stable, but no quantitative earnings or revenue guidance was provided.
- A second-quarter Assembly Equipment contract generated $0.220 million of revenue, with $0.118 million of remaining performance obligations expected to be recognized in the third quarter.
- Key risks include automotive industry conditions, customer concentration, competition, export sales, raw-material prices and availability, labor costs and relations, product liability, warranty and recall claims, environmental obligations, information-system disruptions, key-person dependence, and execution of cost savings.
- The company is involved from time to time in litigation, including environmental claims and contract disputes. Management believes currently unprovided liabilities will not materially affect financial position, although the ultimate amounts cannot presently be determined.
- Federal tax returns for 2015 through 2018 and state returns for 2015 through 2018 remain subject to examination. Management does not anticipate a material adjustment.
- The company adopted ASC Topic 842, Leases, on January 1, 2019; adoption did not have a material financial statement impact.
Investor Verification Checklist
- Verify whether automotive demand and Fastener segment sales stabilized or continued to decline after June 30, 2019.
- Assess the sustainability of Assembly Equipment revenue, backlog, and the $0.118 million remaining contract obligation.
- Monitor steel prices, tariffs, labor costs, and their effect on Fastener gross margins.
- Reconcile cash resources, certificates of deposit maturities, capital spending, and dividend payments against liquidity needs.
- Review customer and automotive-sector concentration, export exposure, and any developments in litigation, environmental matters, warranty claims, or tax examinations.
- Confirm whether the company incurred or disclosed any interest-bearing debt, as the provided balance sheet does not show a separate debt balance.