Chicago Rivet & Machine Co. — Form 10-Q Summary
Business Context and Reporting Period
This unaudited Form 10-Q covers the three months ended March 31, 2012, compared with the three months ended March 31, 2011. The company operates in two segments: fasteners and assembly equipment. Its revenue is concentrated in the automotive industry, primarily in the Midwest, and sales are concentrated among two major customers.
Key Financial Metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $9.20 million | $7.81 million | +17.7% |
| Gross profit | $2.08 million | $1.44 million | +43.9% |
| Gross margin | 22.6% | 18.5% | +4.1 percentage points |
| Operating profit | $686,691 | $159,503 | +330.5% |
| Operating margin | 7.5% | 2.0% | Improved |
| Net income | $493,734 | $117,022 | +321.9% |
| Net margin | 5.4% | 1.5% | Improved |
| Diluted/basic earnings per share as reported | $0.51 | $0.12 | + $0.39 |
| Cash dividends per share | $0.15 | $0.12 | +25.0% |
Fastener sales increased 17.2% to $8.33 million, marking the tenth consecutive quarter of year-over-year growth. Assembly equipment sales increased 22.9% to $866,198. Steel prices, the primary raw material cost, increased 4.4% year over year.
Net cash used in operating activities was $369,402, compared with $330,671 used in the prior-year quarter. Accounts receivable increased $1.81 million, largely reflecting higher sales. Capital expenditures were $102,156, and net cash provided by investing activities was $9,844. Cash dividends paid were $144,920.
Cash and cash equivalents were $199,867 at March 31, 2012, versus $704,345 at December 31, 2011. Certificates of deposit totaled $5.80 million, resulting in approximately $6.0 million of cash and certificates of deposit, down approximately $0.6 million from year-end. Current assets were $18.02 million and current liabilities were $2.56 million, producing working capital of approximately $15.5 million. The filing reports no debt balances.
Total assets were $25.80 million and shareholders’ equity was $22.47 million at March 31, 2012. The effective tax rate was approximately 32.3%, compared with 33.9% in the prior-year quarter.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected improved operations and higher U.S. automotive production, with a relatively mild winter potentially accelerating purchasing decisions.
- Gross profit benefited from higher sales, better plant utilization, and cost controls, which more than offset higher steel prices.
- Selling and administrative expenses increased 8.3% to $1.39 million, primarily because of higher profit-sharing expense and computer-system-related office and maintenance costs. These expenses declined to 15.1% of sales from 16.4%.
- Segment profit increased to $1.25 million from $675,921, including improvement in both the fastener and assembly equipment segments.
- The increase in accounts receivable and dividend payments contributed to negative operating cash flow and lower cash balances.
- The quarter included a $30,000 gain from disposal of equipment, compared with a $1,990 gain in the prior-year quarter.
Guidance, Outlook, Risks, and Unusual Items
Management provided no formal numerical guidance. It described the first-quarter sales and profit improvement as solid but tempered its outlook because of low domestic economic growth and potential disruptions in the automotive supply chain. Management cited a German manufacturing-facility explosion affecting resin supplies for safety-critical automotive components, while noting that it had no direct impact on the company’s production capability.
Key disclosed risks include dependence on the domestic automotive industry, concentration of sales to two major customers, competition, raw-material price and availability, labor-relations issues, product liability, warranty and recall claims, environmental costs, loss of key employees, and difficulty achieving cost savings. The company also faces ordinary-course litigation, including environmental claims and contract disputes; management believes unprovided liabilities will not materially adversely affect financial condition.
Federal tax returns for 2009 through 2011 and state tax returns for 2009 through 2011 remain subject to examination. Management does not anticipate a material effect from potential tax adjustments. Management stated that current cash, cash equivalents, and operating cash flow should provide adequate working capital for the foreseeable future.
Important Facts for Investors to Verify
- Whether automotive production and customer demand remain strong enough to sustain the recent revenue growth.
- The sustainability of improved gross margins despite higher steel and other input costs.
- Accounts receivable collection trends and the company’s ability to convert higher sales into positive operating cash flow.
- Customer concentration and exposure to automotive supply-chain disruptions.
- The effect of the $0.15 per-share dividend on liquidity and future capital allocation.
- Potential exposure from litigation, environmental matters, product liability, warranty claims, and tax examinations.
- Whether the $30,000 equipment-disposal gain is nonrecurring and should be excluded from normalized earnings.