Business Context and Reporting Period
Chicago Rivet & Machine Co. filed its Form 10-K for the fiscal year ended December 31, 2013, with comparative results for 2012. The Company operates in two segments: fasteners and assembly equipment. Its principal market is the North American automotive industry, with additional sales to non-automotive customers. The Company employed 235 people at year-end and had no foreign operations.
Key Financial Metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue | $37.1 million | $34.2 million | Up 8.5% |
| Fourth-quarter revenue | $9.2 million | $8.1 million | Up 14.2% |
| Net income | $2.5 million | $1.7 million | Up 42% |
| Diluted earnings per share | $2.57 | $1.81 | Up 42% |
| Working capital at year-end | $15.5 million | Approximately $15.8 million | Down $0.3 million |
| Cash, cash equivalents and certificates of deposit | $6.7 million | Approximately $7.5 million | Down $0.8 million |
| Capital expenditures | $3.5 million | $1.2 million | Up approximately $2.3 million |
| Dividends paid per share | $0.63 | Value not clearly provided in the filing text | Quarterly rate increased to $0.18 in November 2013 |
Fastener segment revenue was $33.6 million, up 8.4%, while assembly equipment revenue was $3.5 million, up 8.6%. Both segments reported higher gross margins, although the filing text does not provide consolidated gross profit or gross-margin percentages. The implied net margin was approximately 6.7% in 2013 versus approximately 5.1% in 2012.
Operating cash flow was cited by management as a source of liquidity, but the filing text provided does not state its exact amount. The filing does not identify material debt or borrowings. Financing activity in 2013 consisted of approximately $0.6 million of dividend payments, and the Company reported no off-balance-sheet financing arrangements.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected stronger domestic automotive production, increased sales to certain non-automotive customers and higher shipments in both segments.
- Fastener gross margin increased by $1.05 million, aided by favorable material pricing and higher sales.
- Assembly equipment gross margin increased by $0.16 million, supported by higher sales and overhead costs maintained near prior-year levels.
- Selling and administrative expense increased 4.1% to $5.4 million, primarily due to higher profit-sharing expense and sales commissions. As a percentage of sales, these expenses declined to 14.5% from 15.2%.
- Other income increased to $0.16 million, primarily because of gains on equipment sales.
- Capital spending increased substantially, particularly for cold-heading and screw-machine equipment supporting fastener operations.
- Cash and short-term investment holdings declined despite improved profitability, mainly because of increased capital expenditures and higher year-end accounts receivable.
Guidance, Outlook, Risks and Unusual Items
Management expected domestic automotive sales to improve in 2014, potentially reaching their highest level since 2007. The fastener segment was expected to benefit from this outlook. Assembly equipment growth was viewed as more challenging because of moderate overall economic growth and the inclusion of a large order in 2013 results.
- Health insurance expense increased significantly in early 2014, and heating and fuel costs were higher because of a harsh winter.
- Raw-material prices, particularly steel, remain volatile and may be difficult to pass through to customers.
- Approximately 32% of 2013 revenue came from two customers: TI Group Automotive Systems Corporation represented approximately 18% and Fisher & Company approximately 14%.
- The Company is highly dependent on the cyclical domestic automotive industry and faces substantial domestic and international competition.
- Potential risks include supplier disruptions, labor issues at customers or their suppliers, product liability and warranty claims, recalls, environmental liabilities and loss of key personnel.
- Routine litigation and environmental claims existed, but management believed unprovided liabilities would not materially affect financial position.
- The Company increased its quarterly dividend from $0.15 to $0.18 per share in November 2013. In February 2014, the Board declared a $0.18 regular dividend and an additional $0.40 per-share dividend.
- Management stated that cash, cash equivalents and operating cash flow should provide sufficient working capital for the foreseeable future.
Investor Verification Items
- Verify the full consolidated statements of income and cash flows in the incorporated 2013 Annual Report, including exact operating cash flow, gross profit, debt and liquidity balances.
- Assess sustainability of 2013 margin improvement after the favorable material-pricing benefit and the 2014 increases in health insurance, heating and fuel costs.
- Evaluate customer concentration and exposure to changes in domestic automotive production.
- Review the return and utilization of the approximately $3.5 million 2013 capital investment, particularly the fastener equipment additions.
- Confirm the effect of the large 2013 assembly equipment order on comparable 2014 segment performance.
- Review dividend coverage, including the regular and extra dividends declared for payment in March 2014.
- Consider the limited trading volume of the Company’s common stock, which averaged fewer than 4,000 shares per day in 2013.