Chicago Rivet & Machine Co. — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three and six months ended June 30, 2014, filed August 8, 2014. The company operates in two segments: fasteners, including rivets, cold-formed fasteners and screw-machine products; and assembly equipment, including automatic rivet-setting machines, parts and tools. Results benefited from increased North American automotive production. The financial statements are unaudited.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2014 | Six Months Ended June 30, 2014 |
|---|---|---|
| Net sales | $9.5 million | $19.5 million |
| Gross profit | $2.2 million; 23.6% margin | $4.5 million; 23.1% margin |
| Operating profit | $858,921; 9.0% margin | $1.7 million; 8.7% margin |
| Net income | $569,054; 6.0% margin | $1.1 million; 5.8% margin |
| Net income per share | $0.59 | $1.18 |
| Operating cash flow | Not separately provided | $1.3 million |
At June 30, 2014, cash and cash equivalents were $1.1 million and certificates of deposit were $5.4 million, for total cash and short-term deposits of approximately $6.4 million. Working capital was approximately $15.8 million. The company reported no interest-bearing debt in the condensed balance sheet; total liabilities were $3.9 million, compared with shareholders’ equity of $25.3 million. Total assets were $29.2 million.
Capital expenditures were $765,051 for the first half, primarily for fastener-segment equipment. Cash dividends paid were $734,260, including regular quarterly dividends of $0.18 per share and an additional $0.40 per share dividend in the first quarter.
Material Changes Versus Prior Comparable Period
- Second-quarter sales increased 1.9% to $9.5 million; first-half sales increased 5.4% to $19.5 million.
- Second-quarter net income declined 10.8% to $569,054, primarily because the gain on equipment disposals was $40,786 lower and income taxes were higher. First-half net income increased 4.2% to $1.1 million.
- Second-quarter gross profit increased modestly to $2.2 million, while operating profit declined 2.8% to $858,921. Selling and administrative expenses increased 3.8% to $1.4 million.
- Fastener-segment second-quarter sales increased 3.6% to $8.8 million, and first-half sales increased 6.5% to $17.9 million. Higher labor, health insurance and depreciation costs pressured quarterly margins but first-half segment gross margin improved.
- Assembly equipment sales declined 14.8% in the second quarter to $736,084 and 5.2% for the first half to $1.6 million, primarily because fewer machines were shipped. First-half segment margin was lower by $63,991.
- Operating cash flow was $1.3 million, compared with $1.3 million in the first half of 2013. Net cash increased $619,892, although cash plus certificates of deposit declined approximately $0.2 million from year-end after dividends and other investing activity.
- Inventory increased to $5.2 million from $4.9 million at December 31, 2013, while accounts receivable increased to $6.2 million from $5.5 million.
Outlook, Risks, Contingencies and Unusual Items
- Management reported positive demand for fastener products, supported by domestic automotive production, but stated that the assembly equipment order backlog was lower than a year earlier and could adversely affect near-term results.
- Management expects cash, cash equivalents and operating cash flow to provide adequate working capital for the foreseeable future, but provided no quantitative earnings or revenue guidance.
- The company has customer and credit-risk concentration in the automotive industry and the Midwestern United States, with sales concentrated among two major customers.
- Other risks include automotive-industry conditions, competition, raw-material pricing and availability, labor relations, product liability, warranty and recall claims, environmental costs, loss of key employees and difficulty achieving cost savings.
- The company is involved from time to time in litigation, including environmental claims and contract disputes. Management believes unprovided liabilities will not materially affect financial position, although the ultimate amount cannot currently be determined.
- Federal tax returns for 2010 through 2013 remain subject to IRS examination; management does not anticipate a material adjustment. Effective tax rates increased to 34.7% for the quarter and 34.2% for the first half, partly reflecting the prior-year benefit from the Domestic Production Activities Deduction.
- In May 2014, the company disclosed the forthcoming revenue-recognition standard, ASU 2014-09. The company was evaluating its impact; adoption was not permitted before the specified effective period.
- Management concluded that disclosure controls were effective and reported no material change in internal control over financial reporting.
Investor Verification Items
- Verify the sustainability of automotive-driven fastener demand and the effect of any change in North American vehicle production.
- Monitor the assembly equipment backlog, shipments and segment profitability for evidence of continued near-term weakness.
- Assess whether higher labor, health insurance, depreciation and administrative costs continue to offset sales growth.
- Review customer concentration, receivables, inventory levels and valuation reserves for potential working-capital or credit risks.
- Confirm the company’s dividend policy and liquidity after substantial dividend payments, including the special dividend.
- Review subsequent filings for developments in litigation, tax examinations, customer concentration and implementation of revenue-recognition guidance.