Chicago Rivet & Machine Co. — 2019 Q3 Form 10-Q Summary
Business context and reporting period
The filing covers the three and nine months ended September 30, 2019, with comparative periods ended September 30, 2018. Chicago Rivet manufactures and sells rivets, cold-formed fasteners, screw-machine products, automatic rivet-setting machines, and related parts and tools. Its two operating segments are fasteners and assembly equipment. The company is a smaller reporting company and its interim financial statements are unaudited.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net sales | $8.19 million | $8.86 million | $25.69 million | $28.66 million |
| Gross profit | $1.65 million | $1.63 million | $4.86 million | $6.27 million |
| Gross margin | 20.2% | 18.5% | 18.9% | 21.9% |
| Operating profit | $0.37 million | $0.33 million | $0.93 million | $2.08 million |
| Operating margin | 4.5% | 3.7% | 3.6% | 7.3% |
| Net income | $0.32 million | $0.29 million | $0.83 million | $1.70 million |
| Net margin | 3.9% | 3.2% | 3.2% | 5.9% |
| Basic and diluted EPS | $0.32 | $0.30 | $0.86 | $1.76 |
For the nine months, operating cash flow was $2.00 million compared with $1.44 million in the prior-year period. Capital expenditures were $1.56 million, cash dividends paid were $0.93 million, and cash and cash equivalents increased to $1.21 million from $0.71 million at December 31, 2018. Cash, cash equivalents, and certificates of deposit totaled approximately $7.29 million at September 30, 2019, compared with $7.77 million at year-end 2018.
Total assets were $33.08 million and shareholders’ equity was $29.66 million at September 30, 2019. Current assets were $19.29 million versus current liabilities of $2.36 million, producing working capital of approximately $16.9 million. The filing reports no debt balances. Certificates of deposit were $6.08 million. Management stated that existing cash, cash equivalents, and operating cash flow should provide adequate working capital for the next twelve months.
Material changes versus the prior comparable period
- Third-quarter sales declined 7.5%; nine-month sales declined 10.4%, primarily because of weaker fastener demand, particularly from automotive customers.
- Fastener revenue declined 7.9% in Q3 and 12.3% for the nine months. Automotive fastener sales decreased 11.2% in Q3 and 17.0% for the nine months.
- Assembly equipment revenue declined 4.1% in Q3 but increased 7.9% for the nine months. Nine-month assembly equipment gross profit increased $96,071, supported by product mix.
- Despite lower Q3 sales, consolidated gross profit increased modestly, and gross margin improved to 20.2% from 18.5%, reflecting improved operating efficiencies and lower tooling, supplies, and repair expenses.
- Nine-month gross profit fell $1.41 million and gross margin declined to 18.9% from 21.9%. Management attributed the deterioration to lower volume, higher production costs, steel prices approximately 7% above the prior year, and increased labor costs.
- Nine-month net income decreased 51.0%, while selling and administrative expenses decreased 6.1%. Selling and administrative expenses nevertheless increased as a percentage of sales to 15.3% from 14.6%.
- Dividends declared were $0.22 per share in Q3 and $0.96 per share for the nine months, including an additional $0.30 per share dividend paid in the first quarter.
Guidance, outlook, risks, contingencies, and unusual items
The company provided no formal numerical earnings or revenue guidance. Management plans to improve operating efficiencies, increase operating margins, develop new customer relationships, and expand existing relationships. Assembly equipment demand was described as relatively stable, while fastener demand remained pressured.
A United Auto Workers strike against General Motors began in September 2019, and management expects its effects to extend into fourth-quarter results. Steel prices remained above prior-year levels, and trade disputes continued to present a raw-material cost risk. The company also cited exposure to domestic automotive conditions, major-customer concentration, competition, export markets, labor relations, product liability, warranty and recall claims, environmental costs, information-system disruptions, key-person dependence, and difficulties achieving cost savings.
The company adopted ASC Topic 842, Leases, on January 1, 2019 using the modified retrospective method; adoption had no material impact. Revenue of $118,300 related to a remaining assembly-equipment contract performance obligation was recognized in Q3. The company is involved from time to time in litigation, including environmental claims and contract disputes, but management believes unprovided liabilities will not materially adversely affect financial position. Federal and state tax returns remain subject to examination, with no material adjustment currently anticipated.
Important facts for investors to verify
- Whether automotive and international fastener demand recovered after the 2019 slowdown and GM-related strike.
- Whether steel, labor, and other production costs continue to pressure fastener-segment margins.
- The sustainability of the dividend policy, including the additional dividend paid during the first quarter.
- Capital expenditure requirements and the future level of certificates of deposit and other liquidity reserves.
- Customer concentration, automotive exposure, export risk, and the status of litigation, environmental matters, and tax examinations.
- Whether the assembly equipment segment’s stronger nine-month performance can offset continued weakness in fasteners.