Chicago Rivet & Machine Co. — 2021 First-Quarter Form 10-Q
Reporting period: Three months ended March 31, 2021; comparative period is the three months ended March 31, 2020. The financial statements are unaudited.
Business Context and Reporting Period
The company manufactures and sells rivets, cold-formed fasteners, screw-machine products, automatic rivet-setting machines, and related parts and tools. It operates through two segments: fasteners and assembly equipment, with significant exposure to automotive customers and the Midwestern United States.
As of May 3, 2021, 966,132 common shares were outstanding. The company is classified as a smaller reporting company and non-accelerated filer.
Financial Performance and Position
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $9.305 million | $7.576 million | Up 22.8% |
| Gross profit | $2.034 million | $1.310 million | Up 55.2% |
| Gross margin | 21.9% | 17.3% | Up approximately 4.6 percentage points |
| Operating profit | $672,236 | $25,093 | Up $647,143 |
| Income before taxes | $690,128 | $71,568 | Up $618,560 |
| Net income | $540,128 | $56,568 | Up 855.0% |
| Net margin | 5.8% | 0.7% | Up approximately 5.1 percentage points |
| Diluted earnings per share | $0.56 | $0.06 | Up $0.50 |
Selling and administrative expenses increased 6.0% to $1.362 million, but declined to 14.6% of sales from 17.0%. The effective tax rate was approximately 21.7%, compared with 21.0% in the prior-year quarter.
Fastener revenue increased 20.9% to $8.149 million, while assembly equipment revenue increased 37.8% to $1.156 million. Automotive sales were $5.092 million, and non-automotive sales were $4.213 million.
Net cash used in operating activities was $905,953, compared with $490,039 used in the prior-year period. Working-capital investment included a $1.706 million increase in accounts receivable and a $1.159 million increase in inventories. Investing activities provided $1.627 million, primarily from proceeds from certificates of deposit. Capital expenditures were $116,463, and dividends paid were $212,549.
Cash and cash equivalents were $3.076 million at March 31, 2021, compared with $2.568 million at December 31, 2020. Cash, cash equivalents, and certificates of deposit totaled $6.066 million, compared with $7.301 million at year-end. Working capital was $17.093 million. The balance sheet reports no borrowings or other interest-bearing debt.
Total assets were $32.554 million and shareholders’ equity was $29.034 million at March 31, 2021. Total liabilities were $3.520 million.
Material Changes Versus the Prior Comparable Period
- Sales improved substantially in both segments as demand recovered from the pandemic-related disruption that affected the first quarter of 2020.
- Fastener automotive sales increased 14.6%, compared with an 11.8% increase in U.S. light-vehicle sales cited by management.
- Fastener segment gross margin increased by $564,678, and assembly equipment gross margin increased by $159,332.
- Higher sales volume and improved operating conditions drove net income to $540,128 from $56,568.
- The regular quarterly dividend was restored to $0.22 per share after being reduced at the onset of the pandemic in 2020.
- Steel costs were approximately 11% higher than in the first quarter of 2020, and management expects labor and other manufacturing costs to increase.
- Accounts receivable and inventories increased materially because of higher sales activity and accelerated material purchases ahead of anticipated price increases.
Guidance, Outlook, Risks, and Unusual Items
Management believes current cash, cash equivalents, and operating cash flow will provide adequate working capital for the next twelve months. The filing does not provide specific earnings or revenue guidance.
Management stated that the post-pandemic recovery appears to be underway, but noted continuing uncertainty regarding COVID-19, automotive demand, supply-chain disruptions, commodity prices, labor costs, and component shortages that have caused some automobile manufacturers to reduce operations. Cost increases may be difficult to recover.
The company has concentration risk in the automotive industry and the Midwest, as well as exposure to major customers, export markets, competition, raw-material availability, labor issues, product liability and warranty claims, environmental regulations, information-system disruptions, and key-employee retention.
The company recognized $235,210 of revenue during the quarter on assembly-equipment contracts using a progress-based measure; $120,879 of remaining performance obligations was expected to be recognized in the second quarter. Litigation, including environmental claims and contract disputes, is ongoing from time to time, but management does not expect unreserved liabilities to have a material adverse effect. Federal tax returns for 2017 through 2020 remain subject to IRS examination.
Disclosure controls and procedures were assessed as effective, and the filing reports no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the recovery in automotive and non-automotive demand is sustained after the favorable year-over-year comparison.
- Whether steel, labor, and other cost increases compress gross margins or can be passed through to customers.
- The effect of automotive component shortages and broader supply-chain disruptions on production and orders.
- Whether negative operating cash flow continues as receivables and inventories support higher sales.
- The sustainability of the $0.22-per-share quarterly dividend relative to earnings and cash generation.
- The concentration of sales among automotive customers and major accounts, including customer-specific exposure.
- The outcome of pending litigation and tax examinations, although management currently expects no material adverse effect.