Business Context and Reporting Period
Chicago Rivet & Machine Co. filed its Form 10-K for the fiscal year ended December 31, 2011. The company operates in two segments: fasteners and assembly equipment. Its principal market is the North American automotive industry, with no foreign operations and only minor foreign sales. The company employed 221 people at year-end.
Financial Performance and Liquidity
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Revenue | $30.9 million | $28.5 million | +8.4% |
| Net income | $1.25 million | $0.61 million | +107% |
| Diluted earnings per share | $1.30 | $0.63 | +$0.67 |
| Fastener revenue | $27.8 million | $25.3 million | +10.2% |
| Assembly equipment revenue | $3.1 million | $3.3 million | -5.7% |
| Selling and administrative expense | $5.0 million | $4.8 million | +4.8% |
| Capital expenditures | $1.6 million | $0.7 million | Increase of $0.9 million |
Fastener segment gross margin dollars increased by approximately $1.15 million, while assembly equipment gross margin dollars declined by approximately $138,000. Consolidated gross margin percentages and operating margin percentages are not clearly provided in the filing text. Selling and administrative expenses declined to 16.3% of revenue from 16.8%.
Working capital was approximately $15 million at December 31, 2011, up $0.4 million from the beginning of the year. Cash, cash equivalents and certificates of deposit totaled $6.6 million, down $0.5 million. Investing activities included $1.6 million of capital expenditures, $0.4 million of proceeds from asset disposals and a $0.5 million net reduction in certificates of deposit. Financing activity consisted of approximately $0.5 million of dividend payments. The filing does not provide a clear debt balance; it states that the company has no off-balance-sheet financing arrangements. Management believes available cash, cash equivalents and operating cash flow will provide sufficient working capital for the foreseeable future.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected higher volumes for existing customer parts and sales of new parts and to new customers.
- Automotive-sector improvement supported a 10.2% increase in fastener revenue. Assembly equipment revenue declined because machines sold in 2011 had a lower average selling price.
- Profitability improved substantially despite higher steel, fuel, lubricants, plating and other commodity costs.
- Profit-sharing expense increased by approximately $92,000, commissions by approximately $59,000 and office supplies and maintenance by approximately $39,000.
- The company recorded approximately $142,000 of gain on the sale of its Jefferson, Iowa property and approximately $51,000 of gain on the sale of underutilized manufacturing equipment.
- Capital investment increased materially, including $838,000 for cold-heading and screw-machine equipment, to expand fastener capacity and capabilities.
- Inventories increased by approximately $0.9 million and accounts receivable by approximately $0.4 million, partially offset by a $0.4 million increase in accounts payable and accrued expenses.
- The annual dividend was $0.51 per share. A quarterly dividend of $0.15 per share was declared in February 2012.
Guidance, Outlook, Risks and Unusual Items
Management described the outlook for 2012 as favorable but uncertain. Forecasts cited in the filing suggested modest overall economic growth and potentially up to 10% growth in domestic automotive sales. This would favor the fastener segment, while the broader-industry assembly equipment segment could lag. Management expects to pursue new customers, expand existing relationships, improve efficiency and focus on more complex parts.
Raw-material, energy and supply costs remain difficult to forecast and may be difficult to recover through pricing. Key risks include dependence on the cyclical domestic automotive industry, intense global competition, concentration of sales among two customers, steel and other raw-material price volatility, customer or supplier labor disruptions, product liability and warranty claims, environmental liabilities, loss of key personnel and volatility and limited trading volume in the company’s common stock.
Two customers represented approximately 33% of consolidated revenue in 2011, compared with 36% in 2010: TI Group Automotive Systems Corporation represented approximately 17% and Fisher & Company approximately 16%. Management stated that unprovided legal and environmental contingencies are not expected to have a material adverse effect, although ultimate liabilities cannot be determined with certainty. The company’s disclosure controls and internal control over financial reporting were assessed as effective.
Investor Verification Items
- Verify the consolidated statements of income and cash flows incorporated from the 2011 Annual Report, as the filing text does not provide all detailed cash-flow and margin figures.
- Assess customer concentration and the potential impact of losing or reducing business with TI Group Automotive Systems or Fisher & Company.
- Review exposure to steel, energy and other input-cost increases and the company’s ability to recover those costs through pricing.
- Evaluate whether the 2011 automotive recovery and 2012 sales assumptions are sustainable, particularly for the fastener segment.
- Confirm the company’s debt and other contractual obligations; the filing text does not provide a clear debt balance.
- Review the financial impact and recurring nature of the property and equipment disposal gains.