Chicago Rivet & Machine Co. — FY2016 Form 10-K Summary
Business Context and Reporting Period
Annual report for the fiscal year ended December 31, 2016, filed March 20, 2017. The company manufactures fasteners, cold-formed parts, screw-machine products, automatic rivet-setting machines, assembly equipment, and related parts and tools. Operations are divided between the fastener and assembly equipment segments and are concentrated in the North American automotive industry.
The company had 231 employees, no foreign operations, and approximately 12% of sales to foreign customers. Two customers represented approximately 31% of consolidated revenue in 2016: TI Group Automotive Systems, LLC contributed approximately 19% and Fisher & Company approximately 12%.
Financial Performance and Capital Resources
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net sales | $37.0 million | $36.2 million | Up 2.3% |
| Net income | $2.36 million | $1.69 million | Up 39.7% |
| Earnings per share | $2.44 | $1.75 | Up $0.69 |
| Cash, cash equivalents and certificates of deposit | $8.4 million | Approximately $7.4 million | Up approximately $1.0 million |
| Working capital | Approximately $16.5 million | Approximately $15.7 million | Up approximately $0.8 million |
| Capital expenditures | $2.03 million | $2.10 million | Down approximately $0.08 million |
| Depreciation expense | $1.24 million | $1.26 million | Down approximately $0.02 million |
Fastener segment revenue increased 1.6% to $33.13 million. Favorable raw-material prices and a $141,000 reduction in tooling expense increased segment gross margin by $1.14 million for the year. Assembly equipment revenue increased 8.7% to $3.90 million, driven by more machines shipped and higher average selling prices, but segment margin improved by only $2,615 because of a less favorable sales mix.
Selling and administrative expense increased 2.8% to $5.56 million, primarily because of a $111,037 increase in profit-sharing expense. Selling and administrative expense remained approximately 15% of sales. Other income increased to $65,255 from $44,443, primarily from higher interest income. The effective tax rate was 33.6%, compared with 33.3% in 2015.
The filing does not provide a clear consolidated operating margin, gross margin percentage, or free cash flow amount in the supplied text. It states that 2016 investing activity consisted primarily of approximately $2 million of capital expenditures and that the only financing activity was approximately $1 million of dividend payments. No debt balance or material borrowing arrangement is identified. The company had no off-balance-sheet financing arrangements.
The company paid regular dividends of $0.74 per share and an additional $0.25 per share in 2016, for total distributions of $0.99 per share. In February 2017, the board declared a regular dividend of $0.20 per share and an additional dividend of $0.35 per share, both payable March 20, 2017.
Material Changes Versus the Prior Comparable Period
- Consolidated sales increased $847,774, or 2.3%.
- Net income increased $669,339, or 39.7%, reflecting improved segment performance and favorable raw-material costs.
- Fastener revenue increased $536,584, while fourth-quarter fastener revenue declined 0.4% year over year.
- Assembly equipment revenue increased $311,190 for the full year and 12.5% in the fourth quarter.
- Working capital and cash, cash equivalents, and certificates of deposit increased primarily because of more profitable operations.
- Capital expenditures remained substantial, including $758,467 to substantially complete the H & L Tool building expansion.
Outlook, Risks, Contingencies, and Unusual Items
Management expects 2017 automotive sales to remain near the strong levels of the prior two years, although January 2017 retail light-vehicle sales declined year over year. Management views this environment as favorable for the fastener segment. Assembly equipment demand was described as stable, but comparable early-2017 performance may be difficult after particularly strong first-half 2016 sales.
Management cautioned that lower raw-material prices supported 2016 margins but may not persist. Commodity prices have historically been volatile, and customer pricing may be fixed over the multiyear life of a part, limiting the ability to recover cost increases. The company intends to emphasize operational efficiency, customer development, quality, and service.
Principal risks include dependence on the cyclical domestic automotive industry, intense global competition, concentration in two customers, export and foreign-exchange exposure, steel and other raw-material cost fluctuations, customer labor disruptions, product liability and warranty claims, recalls, environmental liabilities, and the loss of key employees. The common stock is thinly traded, with average daily volume below 3,000 shares in 2016.
The company believes existing cash, cash equivalents, and operating cash flow will provide adequate working capital for the next twelve months. Routine litigation and environmental claims exist, but management believes unreserved liabilities will not materially adversely affect financial position. Management reported effective disclosure controls and internal control over financial reporting as of December 31, 2016.
Important Facts for Investors to Verify
- Review the incorporated 2016 Annual Report for the complete balance sheet, cash flow statement, segment disclosures, and notes, which are not fully reproduced in the supplied filing text.
- Verify the sustainability of the 2016 margin improvement, particularly the benefit from favorable raw-material prices and reduced tooling expense.
- Monitor revenue and order trends for TI Group Automotive Systems and Fisher & Company, which together represented approximately 31% of 2016 sales.
- Assess 2017 automotive production and vehicle-sales trends and their effect on the fastener segment.
- Evaluate assembly equipment sales and mix after the strong first half of 2016.
- Confirm the company’s cash generation after approximately $2.03 million of capital expenditures and declared dividends.
- Review the effect of steel prices, trade policies, export exposure, customer labor actions, and potential product liability or environmental claims.