Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results for the second quarter of 2009, as well as those of the current year
to date, continued to be negatively impacted by weak economic conditions and the
dramatic reduction in domestic vehicle sales compared to a year earlier. Net
sales for the second quarter this year totaled $4,679,823, a decline of
$3,367,189, or 41.8%, compared to the year earlier quarter. As of June 30, 2009,
year to date sales totaled $9,439,113, bringing the current year sales decline
to $7,022,225, or 42.7%. Although we continued our progress in reducing expenses
during the quarter, cost reductions were not sufficient to offset the effects of
the decline in sales. The result was a net loss of $439,458, or $0.45 per share,
in the second quarter of 2009 compared to net loss of $19,412, or $0.02 per
share, in the second quarter of 2008. For the first half of the year, the net
loss was $1,063,318, or $1.10 per share, compared to net income of $8,251, or
$0.01 per share, in 2008.
Fastener segment revenues improved in the second quarter of 2009 to
$4,105,171, from $3,629,430 in the first quarter, but trailed revenues in the
second quarter of 2008 by $2,934,385, or 41.7%. For the first six months of the
year, fastener segment revenues have declined by $6,631,082, or 46.2%, from
$14,365,683 to $7,734,601. The decline in sales for the fastener segment is
primarily due to the reduction in domestic automotive production, which declined
over 50% in the first half of the year. With the majority of our revenue in this
segment coming from the automotive sector, we have been particularly vulnerable
to the problems in that sector in recent years, which have resulted in two of
the former "Big 3" filing for bankruptcy protection earlier this year. During
the recent quarter, many automotive companies experienced lengthy production
shut-downs in an effort to bring inventories in line with reduced global demand.
The current recession has resulted in reduced demand among our non-automotive
customers as well. In response to the drop in demand, we have adjusted our
operations accordingly. Even though we reduced all major categories of
manufacturing costs, these savings did not fully offset the decline in sales
volume, resulting in a $514,000 reduction in fastener segment gross margin in
the second quarter and a $1,496,000 reduction in the year to date amount,
compared to the year earlier periods.
Revenues within the assembly equipment segment were $574,652 in the second
quarter of 2009, a decline of $432,804, or 43%, compared to the second quarter
of 2008, when revenues were $1,007,456. This year's second quarter sales were
$555,208 lower than the first quarter, more than offsetting the improvement in
fastener segment sales. This decline was due in part to the shipment of certain
high dollar orders in the first quarter. Machine sales, which are included in
this segment, are particularly sensitive to economic downturns, and we have seen
our unit shipments and revenues decline as a result of the current environment.
While manufacturing costs were reduced in response to lower demand, these
reductions were not sufficient to fully offset the lower revenue, resulting in a
$183,000 decline in gross margin, to $113,000, compared to the second quarter of
2008. For the first six months of 2009, revenues in this segment amounted to
$1,704,512, a decline of $391,143, or 18.7%, compared to the first six months of
2008. As with second quarter results, the reduction in production related
expenses did not keep pace with the decline in revenues on a year to date basis,
resulting in a gross margin of approximately $390,000 compared to $632,000 last
year.
Selling and administrative expenses for the second quarter of 2009 were
approximately $89,000 lower than during the second quarter of 2008. The second
quarter reduction is primarily due to a $57,000 decline in commissions, caused
by lower sales activity in the current year quarter, and reduced payroll related
expenses of approximately $34,000, due to headcount reductions since the second
quarter of last year. On a year to date basis, selling and administrative
expenses have declined $158,000 compared to the first six months of 2008. The
largest component of the year to date decline is a $110,000 drop in commissions
related to lower sales in the current year. The remainder of the net reduction
relates to various items, including travel and office supplies, which are lower
as a result of cost control efforts.
Working capital at June 30, 2009 amounted to $14.4 million, a reduction of
$1 million from the beginning of the year. Most of the net decline relates to
the reduction in inventories, related to lower quantities on hand as well as
lower prices for raw materials which had increased dramatically in the second
half of 2008. Accounts receivable have declined $.4 million due to the lower
sales at the end of the second quarter compared to the end of the year, but this
amount is offset by the $.5 million increase in prepaid income taxes created by
tax basis losses. Total current liabilities increased slightly during the first
half of the year, with the decline in unearned revenue of $.3 million, related
to certain large orders that shipped in the first quarter, offset by normal
seasonal increases in accounts payable and accrued expenses. The net result of
these changes and other cash flow items on cash, cash equivalents and
certificates of deposit leaves such total balances relatively unchanged from the
beginning of the year at $7.6 million. Management believes that current cash,
cash equivalents and operating cash flow will provide adequate working capital
for the foreseeable future.
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The decline in revenues in the second quarter and year to date reflects the
depressed levels of production activity in our primary markets, caused by the
challenges facing the automotive industry and the distressed economic
environment. While there are signs that economic conditions have started to
stabilize, we are mindful that few predicted the severity or length of the
current crisis and remain cautious in the near-term. Our fastener segment sales
in the second quarter were down significantly compared to the year earlier
period, but improved compared to the first three months of 2009, offering some
optimism as this marked the first quarter-to-quarter increase in two years for
this segment. While predicting the timing or strength of any recovery is
difficult, we believe our sound financial condition leaves us well positioned to
take advantage of opportunities that this environment creates. In response to
these difficult market conditions, we will continue our efforts to secure new
business while making adjustments to our activities where necessary, without
sacrificing the quality that our customers expect.
This discussion contains certain "forward-looking statements" which are
inherently subject to risks and uncertainties that may cause actual events to
differ materially from those discussed herein. Factors which may cause such
differences in events include, those disclosed under "Risk Factors" in our
Annual Report on Form 10-K and in the other filings we make with the United
States Securities and Exchange Commission. These factors, include among other
things: conditions in the domestic automotive industry, upon which we rely for
sales revenue, the intense competition in our markets, the concentration of our
sales to two major customers, the price and availability of raw materials, labor
relations issues, losses related to product liability, warranty and recall
claims, costs relating to environmental laws and regulations, the loss of the
services of our key employees and difficulties in achieving expected cost
savings. Many of these factors are beyond our ability to control or predict.
Readers are cautioned not to place undue reliance on these forward-looking
statements. We undertake no obligation to publish revised forward-looking
statements to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
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CHICAGO RIVET & MACHINE CO.
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