Business Context and Reporting Period
Chicago Rivet & Machine Co. filed this unaudited Form 10-Q for the quarter ended March 31, 2016. The company operates through two segments: fasteners and assembly equipment, serving customers primarily in the automotive industry and Midwest markets.
Financial Highlights
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $9.596 million | $9.284 million | Up 3.4% |
| Gross profit | $2.429 million | $2.094 million | Up 16.0% |
| Gross margin | 25.3% | 22.5% | Up 2.8 percentage points |
| Operating profit | $0.970 million | $0.668 million | Up 45.2% |
| Operating margin | 10.1% | 7.2% | Up 2.9 percentage points |
| Net income | $0.647 million | $0.462 million | Up 39.9% |
| Net margin | 6.7% | 5.0% | Improved |
| Basic and diluted EPS | $0.67 | $0.48 | Up $0.19 |
| Cash dividends per share | $0.43 | $0.43 | Unchanged |
Segment Performance
- Fastener: Revenue increased 0.6% to $8.447 million. Segment operating profit increased to $1.226 million from $1.018 million, supported by favorable raw material prices and improved gross margins. Demand for certain non-automotive parts declined.
- Assembly equipment: Revenue increased 30.1% to $1.149 million, primarily due to more machines shipped. Segment operating profit increased to $0.433 million from $0.245 million. The machine order backlog was higher than a year earlier.
Cash Flow, Liquidity, and Capital Structure
- Net cash provided by operating activities was $0.678 million, compared with $0.764 million in Q1 2015.
- Capital expenditures were approximately $0.597 million, compared with $0.371 million in the prior-year quarter.
- Cash and cash equivalents increased to $0.965 million from $0.801 million at December 31, 2015. Certificates of deposit totaled $6.067 million, resulting in cash, cash equivalents, and certificates of deposit of approximately $7.0 million at quarter-end.
- Working capital was approximately $15.6 million, down approximately $0.1 million from year-end.
- Total assets were $30.449 million and total liabilities were $3.726 million at March 31, 2016. The filing does not report outstanding borrowings or debt.
- Shareholders’ equity was $26.723 million. Accounts receivable increased $0.7 million and inventories increased $0.4 million from year-end, partly offset by a $0.7 million increase in accounts payable.
Material Changes Versus the Prior Comparable Period
- Revenue increased $0.313 million, driven primarily by strong machine sales and improved automotive demand in China.
- Gross profit increased $0.335 million due to a more profitable sales mix and favorable raw material prices.
- Selling and administrative expenses increased 2.3% to $1.459 million, primarily because of higher profit-sharing expense, but declined slightly as a percentage of sales to 15.2% from 15.4%.
- The effective tax rate increased to approximately 34.2% from 31.8%; the prior-year rate benefited primarily from the Domestic Production Activities Deduction.
- The company paid a regular quarterly dividend of $0.18 per share and an additional $0.25 per share dividend based on 2015 results.
- The company early adopted ASU 2015-17, which required deferred tax assets and liabilities to be classified as noncurrent. The December 31, 2015 balance sheet was retrospectively reclassified by $0.425 million.
Outlook, Risks, Contingencies, and Unusual Items
- Management described demand in the fastener segment as stable and supported by a healthy domestic automotive market.
- Management expects the assembly equipment segment to benefit in the near term from an order backlog exceeding the prior-year level.
- Raw material prices increased early in the second quarter and may be difficult to mitigate.
- Management expects existing cash, cash equivalents, and operating cash flow to provide adequate working capital for the next twelve months.
- The company invested approximately $0.6 million in equipment and facility improvements during the quarter to remain competitive and support growth.
- The company is exposed to domestic automotive conditions, customer concentration involving two major customers, export risks, raw material availability and pricing, labor issues, product liability, warranty and recall claims, environmental costs, key-employee risk, competition, and challenges in achieving cost savings.
- The company is periodically involved in litigation, including environmental claims and contract disputes. Management believes unprovided contingencies will not materially affect financial position, although the ultimate amount of liability cannot currently be established.
- Federal income tax returns for 2012 through 2015 remain subject to IRS examination; management does not anticipate a material adjustment.
Important Facts for Investors to Verify
- Whether assembly equipment backlog converts into shipments and revenue as expected.
- The sustainability of favorable raw material costs and the effect of reported second-quarter cost increases on margins.
- Automotive demand in North America and China, including exposure to two major customers.
- Changes in accounts receivable, inventories, and operating cash flow as sales activity continues.
- Capital expenditure requirements and the company’s ability to maintain dividends while funding investments.
- Potential effects of litigation, environmental matters, product liability claims, and pending federal or state tax examinations.
- Actual full-year results, since management states that first-quarter results are not necessarily indicative of the full year.