Chicago Rivet & Machine Co. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2015. The interim financial statements are unaudited. The company manufactures fasteners and assembly equipment, with operations in the fastener and assembly equipment segments.
Financial performance
| Metric | Three months ended June 30, 2015 | Three months ended June 30, 2014 | Six months ended June 30, 2015 | Six months ended June 30, 2014 |
|---|---|---|---|---|
| Net sales | $9.21 million | $9.50 million | $18.49 million | $19.45 million |
| Gross profit | $2.25 million | $2.24 million | $4.34 million | $4.50 million |
| Operating profit | $0.84 million | $0.86 million | $1.51 million | $1.71 million |
| Net income | $0.57 million | $0.57 million | $1.03 million | $1.14 million |
| Net income per share | $0.59 | $0.59 | $1.07 | $1.18 |
- Second-quarter sales declined 3.1%; first-half sales declined 4.9% year over year.
- Second-quarter gross margin was approximately 24.4%, operating margin 9.1%, and net margin 6.2%. First-half gross margin was approximately 23.5%, operating margin 8.1%, and net margin 5.6%.
- Second-quarter net income was essentially unchanged because of favorable raw-material prices, lower production expenses, and stronger assembly equipment sales.
- Effective tax rates were approximately 32.7% in the second quarter and 32.3% for the first half, helped primarily by the Domestic Production Activities Deduction.
Cash flow, liquidity, debt, and capital resources
- Net cash provided by operating activities was $2.09 million in the first half of 2015, compared with $1.25 million in the comparable 2014 period.
- Capital expenditures were $0.87 million, primarily for production equipment. The company also entered into a $1.50 million contract to expand its Madison Heights, Michigan, fastener facility; construction was expected to begin in the third quarter.
- Cash and cash equivalents totaled $1.60 million at June 30, 2015. Certificates of deposit totaled $5.32 million, for combined cash and certificate-of-deposit balances of approximately $6.92 million.
- Working capital was approximately $16.1 million, up approximately $0.2 million from year-end 2014. Management stated that cash, cash equivalents, and operating cash flow should provide adequate working capital for the next 12 months.
- The balance sheet reports no borrowings or other debt. Total liabilities were $3.70 million, compared with shareholders’ equity of $26.19 million.
- Dividends paid during the first half totaled $0.59 million, including two regular quarterly dividends of $0.18 per share and an additional $0.25 per share dividend in the first quarter.
Material changes versus the prior comparable period
- Fastener revenue decreased 5.6% in the second quarter and 6.6% for the first half. Demand from certain automotive customers remained below the prior year, although sales to a China location of one automotive customer improved during the second quarter.
- Assembly equipment revenue increased 26.3% in the second quarter and 13.4% for the first half, driven by more machines shipped, higher average machine prices, and improved tools and parts sales.
- Fastener segment margin was pressured by lower sales, but the impact was partly offset by lower tooling, production supplies, natural gas, and raw-material costs.
- Selling and administrative expenses increased 2.1% in the second quarter and 1.5% for the first half. As a percentage of first-half sales, these expenses rose to 15.3% from 14.4%.
- Cash, cash equivalents, and certificates of deposit increased by approximately $0.6 million from year-end, while total assets increased to $29.88 million from $28.97 million.
Outlook, risks, contingencies, and unusual items
- Management described second-quarter sales as mixed and said fastener demand remained uneven. The company plans to continue operational adjustments and cost controls.
- Management stated that the company’s financial condition remained sound and supported continued investment in operations, but the filing provides no quantitative earnings or revenue guidance.
- The company has customer and credit concentration primarily in the automotive industry and the Midwestern United States, and management identified concentration of sales to two major customers as a risk.
- Other identified risks include domestic automotive conditions, competition, raw-material price and availability, labor relations, product liability and warranty or recall claims, environmental costs, dependence on key employees, and the ability to achieve expected cost savings.
- The company is involved from time to time in litigation, including environmental claims and contract disputes. Management believes unprovided liabilities will not have a material adverse effect, but the ultimate amounts cannot currently be established.
- Federal tax returns for 2011 through 2014 remain subject to IRS examination. Management does not anticipate a material effect from potential adjustments. State returns for the same period remain subject to examination by applicable authorities.
- Disclosure controls and procedures were determined to be effective, and no material changes to internal control over financial reporting were reported.
Investor verification points
- Verify the sustainability of lower fastener demand and the company’s reliance on automotive customers, including two major customers.
- Monitor whether growth in assembly equipment sales can continue to offset weakness in the fastener segment.
- Assess the timing, final cost, and expected returns of the $1.50 million Madison Heights facility expansion.
- Reconcile operating cash flow with capital expenditures, dividends, and changes in certificates of deposit.
- Review future raw-material, labor, environmental, litigation, tax, and product-liability exposures; the filing does not provide clear quantified amounts for these potential contingencies.