Chicago Rivet & Machine Co. — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three and nine months ended September 30, 2017, filed November 6, 2017. The company operates two segments: fasteners, primarily serving automotive customers, and assembly equipment, including automatic rivet-setting machines and related parts and tools. The company had 966,132 common shares outstanding as of November 3, 2017.
Key Financial Metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Net sales | $8.387 million | $8.854 million | $27.306 million | $28.271 million |
| Gross profit | $1.755 million | $1.985 million | $6.081 million | $7.023 million |
| Gross margin | 20.9% | 22.4% | 22.3% | 24.8% |
| Operating profit | $476,040 | $663,136 | $1.875 million | $2.792 million |
| Operating margin | 5.7% | 7.5% | 6.9% | 9.9% |
| Net income | $335,835 | $462,329 | $1.309 million | $1.904 million |
| Net margin | 4.0% | 5.2% | 4.8% | 6.7% |
| Diluted EPS | $0.35 | $0.48 | $1.36 | $1.97 |
For the nine months, net cash provided by operating activities was $1.644 million, compared with $2.887 million in the prior-year period. Capital expenditures were $1.070 million, cash dividends paid were $917,825, and cash and cash equivalents increased to $759,138 from $353,475 at year-end 2016.
Certificates of deposit totaled $7.312 million at September 30, 2017, resulting in approximately $8.1 million of cash, cash equivalents, and certificates of deposit. Current assets were $19.411 million and current liabilities were $2.769 million. No debt balance is reported in the condensed balance sheet. Total assets were $32.011 million and shareholders’ equity was $28.283 million.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales declined 5.3%; year-to-date sales declined 3.4%.
- Fastener sales declined 7.5% in the quarter and 4.2% year to date, primarily because of reduced sales to certain large automotive customers and lower North American light-vehicle production.
- Fastener gross margin declined by $311,204 in the quarter and $1.025 million year to date, reflecting lower sales and higher material prices.
- Assembly equipment sales increased 17.8% in the quarter and 3.8% year to date. Higher-value machine shipments increased third-quarter segment gross margin by $80,690.
- Year-to-date selling and administrative expense decreased 0.6%, with lower payroll and profit-sharing costs substantially offset by approximately $167,000 of ERP implementation expenses.
- Dividends declared increased to $0.95 per share year to date from $0.79 per share in the prior-year period, including an extra $0.35-per-share dividend in the first quarter.
Guidance, Outlook, Risks, and Unusual Items
Management provided no formal numerical earnings or revenue guidance. Management stated that replacement demand following Hurricanes Harvey and Irma could support automotive customer demand in the fourth quarter, although general economic conditions were expected to remain relatively unchanged. Assembly equipment results could trail the prior-year fourth quarter because the 2016 period included a particularly large order.
The ERP system conversion at one location was completed during the third quarter and is expected to eliminate the most significant increase in selling and administrative expense incurred during 2017. Management characterized the company’s financial condition as strong and indicated that it could pursue profitable revenue growth.
- Key risks include dependence on the domestic automotive industry and concentration of sales to two major customers.
- Additional risks include competition, raw-material price and availability, labor relations, product liability, warranty and recall claims, environmental compliance costs, loss of key employees, and failure to achieve expected cost savings.
- The company is involved periodically in litigation, including environmental claims and contract disputes. Management believes unprovided liabilities will not have a material adverse effect, but the ultimate amounts are not determinable from the filing.
- Federal tax returns for 2014–2016 and state returns for 2014–2016 remain subject to examination. Management does not expect a material adjustment.
- The company expects adoption of the new revenue-recognition standard to have no material financial statement impact, apart from expanded disclosures, but had not selected a transition method and did not plan early adoption.
The filing states that disclosure controls were effective and that no material changes occurred in internal control over financial reporting. One MD&A sentence refers to working capital “as of September 30, 2016,” although the surrounding discussion describes 2017 year-to-date changes; the filing text does not clearly resolve this apparent reference error.
Investor Verification Items
- Verify the sustainability of automotive demand and the effect of lower vehicle production on the fastener segment.
- Monitor material costs and fastener gross-margin recovery.
- Assess whether assembly equipment growth can offset weakness in fasteners, particularly against the prior year’s large fourth-quarter order.
- Confirm the ongoing cash requirements for capital expenditures, dividends, and inventory and receivables growth.
- Review customer concentration, contingent litigation and environmental exposures, and tax examination developments.
- Reconcile the MD&A working-capital date reference and review the company’s subsequent revenue-recognition adoption disclosures.