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 above under Risk Factors and elsewhere in this Form
10-K.
As stated elsewhere in this filing, such 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 a major customer, risks related to export sales, 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, and the loss of the services of our key employees. 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.
RESULTS OF OPERATIONS
Financial results
for 2017 were positive, although not as strong as those reported in 2016. Net sales were $35,764,714 in 2017 compared to $37,022,378 in 2016, a decline of $1,257,664, or 3.4%. Net income for 2017 was $2,079,082, or $2.15 per share, compared to
$2,356,980, or $2.44 per share, in 2016.
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2017 Compared to 2016
Fastener segment revenues were $7,658,239 in the fourth quarter of 2017, a decline of $73,195, or 0.9%, from $7,731,434 reported in the fourth
quarter of 2016. Fastener segment revenues for the full year were $31,977,964 in 2017 compared with $33,126,599 in 2016, a decline of $1,148,635, or 3.5%. Our fastener segment relies on the automotive sector for the majority of its revenues.
Domestic automobile and light truck sales declined approximately 2% during 2017, which negatively impacted our sales. During 2017, fastener segment margins were pressured due to greater quality related expenses and a reversal of the favorable raw
material prices experienced in 2016. These factors contributed to a net reduction in gross margin for the fastener segment of $103,117 in the fourth quarter and $1,128,434 for the full year of 2017 compared to 2016.
Assembly equipment segment revenues were $800,884 in the fourth quarter of 2017, a decline of $218,661, or 21.4%, compared to the strong
results in the fourth quarter of 2016, when revenues were $1,019,545. For the full year 2017, assembly equipment segment revenues were $3,786,750, a decline of $109,029, or 2.8%, compared to $3,895,779 reported in 2016. The decrease in fourth
quarter and full year sales was primarily due to a reduction in the number of rivet setting machines shipped compared to the prior year periods. These declines were partially offset by an increase in machine parts and tool sales during 2017. The net
decline in assembly equipment segment sales was the primary cause of the $83,200 reduction in segment margins in the fourth quarter of 2017, however through effective cost controls, margins for the year were relatively unchanged.
Selling and administrative expenses were $5,548,541 in 2017 compared to $5,559,436 in 2016, a decline of $10,895, or 0.2%. Profit sharing
expense declined $118,000 for the year due to lower operating profit and payroll expense declined $83,000 due to reduced headcount. Largely offsetting these reductions was approximately $167,000 in expenses related to the implementation of a new ERP
system at one of our locations. As a percentage of net sales, selling and administrative expenses were 15.5% compared to 15% in 2016.
Other income was $100,901 in 2017 compared to $65,255 in 2016. Other income is primarily comprised of interest income which increased during
the year due to rising interest rates and greater amounts invested in certificates of deposit compared to the prior year.
The
Companys effective income tax rates were 15.7% and 33.6% in 2017 and 2016, respectively. The rate was lower than the U.S. federal statutory rate in 2017 primarily due to the enactment of the Tax Cuts and Jobs Act (the Act) in
December 2017. Among other changes, the Act reduced the maximum corporate tax rate from 35% to 21% beginning in 2018. Although the lower tax rate takes effect in 2018, deferred tax assets and liabilities should be measured using the enacted tax rate
expected to apply in the years in which they are expected to be settled. The Company recorded a
one-time
net income tax benefit of $432,000 in the fourth quarter of 2017 as a result of the revaluation of the
Companys deferred tax assets and liabilities to reflect the lower future U.S. corporate tax rates. The 2016 rate was lower than the U.S. federal statutory rate primarily due to the Domestic Production Activities Deduction allowed under
Internal Revenue Code Section 199.
DIVIDENDS
In determining to pay dividends, the Board considers current profitability, the outlook for longer-term profitability, known and potential cash
requirements and the
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overall financial condition of the Company. The Company paid four regular quarterly dividends totaling $.80 per share during 2017. In addition, an extra dividend of $.35 per share was paid during
the first quarter, bringing the total distribution for the year to $1.15 per share. On February 19, 2018, the Board of Directors declared a regular quarterly dividend of $.21 per share, an increase of 5% from the prior quarter, payable
March 20, 2018 to shareholders of record on March 5, 2018. This continues the uninterrupted record of consecutive quarterly dividends paid by the Company to its shareholders that extends over 84 years. At that same meeting, the Board also
declared an extra dividend of $.30 per share payable March 20, 2018 to shareholders of record on March 5, 2018.
PROPERTY, PLANT AND
EQUIPMENT
Capital expenditures during 2017 totaled $1,337,941. The fastener segment accounted for $1,093,539 of the total, including
$904,312 for production equipment. Cold heading and screw machine equipment additions were $303,992, quality control equipment additions were $281,983, additions for equipment to perform secondary operations on parts were $261,143 and $57,194 was
expended for general plant equipment. The remainder of the fastener segment additions relate to building improvements and technology equipment. Assembly equipment segment additions totaled $178,761, primarily for production equipment. Additional
investments of $65,641 were made in 2017 for building improvements that benefit both operating segments.
Total capital expenditures in
2016 were $2,027,860. Fastener segment additions accounted for $1,683,953 of the total, including $758,467 for the substantial completion of the H & L Tool building expansion that was begun in 2015. Cold heading and screw machine equipment
additions totaled $180,818 while secondary processing equipment totaled $301,932. Inspection equipment comprised $247,330 of the fastener segment additions and the remaining additions of $195,406 were for various general plant equipment. Assembly
equipment segment additions in 2016 were $189,568, for production equipment. Investments for the benefit of both operating segments, primarily for building improvements, totaled $154,339 during 2016.
Depreciation expense amounted to $1,231,546 in 2017 and $1,242,357 in 2016.
LIQUIDITY AND CAPITAL RESOURCES
Working
capital at December 31, 2017 was approximately $17 million, an increase of $.6 million from the beginning of the year. The most significant factor in the change was the net increase in cash and certificates of deposit as a result of
continued profitable operations in 2017 and the reduction in capital expenditures compared to the prior year. The Companys holdings in cash, cash equivalents and certificates of deposit amounted to $9 million at the end of 2017, an
increase of $.6 million. The Companys investing activities in 2017 consisted primarily of capital expenditures of $1.3 million. The only financing activity during 2017 was the payment of approximately $1.1 million in dividends.
Management believes that current cash, cash equivalents and operating cash flow will be sufficient to provide adequate working capital
for the next twelve months.
Off-Balance
Sheet Arrangements
The Company has not entered into, and has no current plans to enter into, any
off-balance
sheet
financing arrangements.
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APPLICATION OF CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of revenue and expenses during the reporting period. A summary
of critical accounting policies can be found in Note 1 of the financial statements.
NEW ACCOUNTING STANDARDS
The Companys financial statements and financial condition were not, and are not expected to be, materially impacted by new, or proposed,
accounting standards. A summary of recent accounting pronouncements can be found in Note 1 of the financial statements.
OUTLOOK FOR 2018
We started 2018 with a more cautious outlook than a year ago. U.S. auto and light truck sales, not unexpectedly, declined from their recent
peaks during 2017 and are forecast to decline further in 2018. With the majority of our fastener segment revenues coming from the automotive sector, revenue growth may be more difficult as a result. During 2017, we did add a number of
non-automotive
customers in the fastener segment which should help offset any shortfalls related to lower domestic automobile production. Additionally, we experienced increases in the cost of our primary raw
materials during 2017 and have seen further increases in early 2018. Increases in costs can be difficult to recover in some of the markets we serve as certain customers expect prices of their parts to be held constant over the multi-year life of
that part. Both of these factors will contribute to a more challenging environment for our fastener segment operations. The assembly equipment segment reported results in 2017 that were comparable to those of the prior year, however we entered 2018
with less of a machine order backlog than a year ago which will make achieving similar results for that segment more difficult.
The
recently enacted tax reform and the expected increase in interest rates are two more variables that will impact results in 2018. In anticipation of the challenges ahead, we will continue our efforts to improve operational efficiency as a means of
improving margins. We will also continue our efforts to develop new customer relationships and build on existing ones in all the markets we serve by emphasizing our experience, product quality and customer service in a very competitive global
marketplace.
Over the last five years, we have invested $10.7 million in equipment and facilities upgrades in order to increase our
capabilities, expand production capacity and improve operating efficiency. These investments, which we feel are necessary to remain competitive, have been made possible by our consistent profitability during that period. That profitability has also
allowed us to pay dividends of $4.7 million over the same period and declare an additional special dividend of $.3 million, to be paid in the first quarter of 2018.
The positive results in the past year would not have been possible without the conscientious efforts of our dedicated employees, who
consistently strive to meet the challenges that characterize todays manufacturing environment. We are grateful for their contributions towards meeting our customers expectations related to quality, price and service. We also take this
opportunity to thank our customers for having the confidence in us to be a part of their success and our shareholders for their continued support.
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