Business Context and Reporting Period
Chicago Rivet & Machine Co. filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2018. The company manufactures and sells rivets, cold-formed fasteners, screw-machine products, automatic rivet-setting machines, parts, and related tools. It operates through Fastener and Assembly Equipment segments, with substantial exposure to automotive customers.
Key Financial Metrics
| Metric | Q2 2018 | Q2 2017 | Six Months 2018 | Six Months 2017 |
|---|---|---|---|---|
| Net sales | $9.79 million | $9.44 million | $19.80 million | $18.92 million |
| Gross profit | $2.29 million | $2.07 million | $4.63 million | $4.33 million |
| Operating profit | $0.88 million | $0.65 million | $1.75 million | $1.40 million |
| Net income | $0.70 million | $0.46 million | $1.41 million | $0.97 million |
| Diluted EPS | $0.73 | $0.48 | $1.46 | $1.01 |
| Cash flow from operations | Not separately provided | Not separately provided | $0.70 million | $0.81 million |
Calculated gross margin was approximately 23.4% in the second quarter and 23.4% for the first six months, compared with approximately 21.9% and 22.9%, respectively, in the prior-year periods. Net margin was approximately 7.2% in the second quarter and 7.1% for the first six months, compared with 4.9% and 5.1% in 2017.
- Fastener revenue increased 11.6% in the quarter and 6.7% year to date. Fastener segment gross margin increased 31.7% in the quarter and 12.2% year to date.
- Assembly Equipment revenue declined 43.3% in the quarter and 11.5% year to date, primarily because high-value machine orders shipped in the prior-year quarter. First-half segment gross margin declined to $0.61 million from $0.74 million.
- Selling and administrative expense declined 0.6% in the quarter and 1.7% year to date. First-half expense was 14.5% of sales versus 15.5% in 2017.
- Effective tax rates were 23.1% in the quarter and 22.7% year to date, versus 31.1% and 32.5%, respectively, in 2017. The reduction primarily reflects the Tax Cuts and Jobs Act.
Liquidity, Cash Flow, Debt, and Balance Sheet
- At June 30, 2018, cash and cash equivalents were $1.29 million and certificates of deposit were $7.06 million, for total cash and near-cash investments of approximately $8.35 million.
- Working capital was approximately $17.7 million, up approximately $0.7 million from year-end 2017.
- Accounts receivable increased to $6.91 million from $5.33 million, and inventory increased to $5.45 million from $4.53 million. Management attributed the increases to higher sales and accelerated raw-material purchases ahead of tariff charges.
- Net cash provided by operating activities was $0.70 million, compared with $0.81 million in the prior-year period. Capital expenditures were $0.64 million, and dividends paid were $0.70 million.
- Total assets were $33.58 million and total liabilities were $4.00 million at June 30, 2018. The filing does not disclose debt or borrowings; the balance sheet shows no debt line item.
Material Changes, Outlook, and Risks
- Sales and profitability improved year over year, driven primarily by stronger Fastener demand, a 2% increase in U.S. light-vehicle sales, new non-automotive customers, lower tooling costs, and reduced selling and administrative expense.
- Higher steel prices negatively affected margins and were expected to remain a concern. Management also cited potential disruption from sourcing changes and raw-material cost increases.
- Management described the near-term Assembly Equipment outlook as positive because the machine-order backlog exceeded the prior-year level.
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method. Adoption produced no cumulative adjustment and no material impact on the financial statements.
- The company has customer and credit-risk concentration in the automotive industry and the Midwestern United States, including concentration of sales with a major customer.
- Other risks include domestic automotive conditions, competition, export exposure, raw-material availability and pricing, labor issues, product liability, warranty and recall claims, environmental costs, loss of key employees, and difficulty achieving cost savings.
- The company is involved from time to time in litigation, including environmental claims and contract disputes. Management did not expect unprovided contingencies to have a material adverse effect, although the ultimate liability cannot be determined.
- Federal tax returns for 2014 through 2017 and state tax returns for 2014 through 2017 remain subject to examination; management does not anticipate a material adjustment.
Investor Verification Items
- Verify whether higher steel prices, tariffs, and sourcing changes continued to pressure gross margins after June 30, 2018.
- Assess the sustainability of Fastener segment growth, particularly non-automotive customer additions and automotive demand.
- Review Assembly Equipment backlog conversion and the timing of large machine orders.
- Monitor the significant increase in accounts receivable and inventory relative to year-end 2017 and its effect on cash conversion.
- Evaluate customer concentration and exposure to the domestic automotive industry.
- Confirm the status of pending litigation, environmental matters, tax examinations, and any related reserves.