Business Context and Reporting Period
Company: Chicago Rivet & Machine Co.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2007
Business Overview: The Company operates in two segments: Fasteners (rivets, cold-formed fasteners, screw machine products) and Assembly Equipment (automatic rivet setting machines, parts, tools, and leasing). The Company serves primarily the domestic automotive industry and the Midwestern United States.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2007 |
Six Months Ended June 30, 2007 |
Six Months Ended June 30, 2006 |
|---|---|---|---|
| Net Sales & Lease Revenue | $10,130,320 | $20,077,896 | $21,998,317 |
| Gross Profit | $2,219,048 | $4,150,109 | $4,833,012 |
| Operating Profit | $695,795 | $1,080,436 | $1,165,762 |
| Net Income | $523,399 | $833,671 | $857,810 |
| Diluted EPS | $0.54 | $0.86 | $0.89 |
| Cash & Equivalents | $1,396,348 | $1,396,348 | $304,008 |
| Working Capital | $15,897,575 | $15,897,575 | $15,242,183 |
| Debt | $0 | $0 | $0 |
Note: Working Capital calculated as Total Current Assets ($19,020,242) minus Total Current Liabilities ($3,122,667). The Company has a $1.0 million line of credit which remains unused.
Material Changes vs. Prior Period
- Revenue Decline: Net sales for the six months ended June 30, 2007, decreased by $1,920,421 (8.7%) compared to the prior year. The Fastener segment declined 6% and the Assembly Equipment segment declined 24% year-to-date.
- Profitability Improvement: Despite lower sales, Net Income for the quarter increased from $468,526 in 2006 to $523,399 in 2007. This improvement is primarily attributed to the absence of a $400,401 plant closing expense recorded in the second quarter of 2006.
- Expense Reductions: Cost of goods sold decreased due to lower depreciation ($250,000 reduction YTD), reduced expediting/rejection expenses, and decreased outside machining costs. Selling and administrative expenses declined $217,972 YTD due to lower headcount and legal fees.
- Cash Flow: Net cash provided by operating activities increased to $573,246 for the six months ended June 30, 2007, compared to $318,968 in the prior year period.
Outlook, Risks, and Management Commentary
- Market Conditions: Results continue to be dampened by a decline in domestic automotive sales and overall domestic manufacturing activity. The Fastener segment has experienced four straight quarterly declines.
- Plant Consolidation: The transfer of production from Jefferson, Iowa, to Tyrone, Pennsylvania, is yielding positive cost reductions, though these are currently masked by the overall sales decline.
- Liquidity: Management believes current cash, operating cash flow, and the available $1.0 million line of credit are adequate for the foreseeable future.
- Risks: Key risks include reliance on the domestic automotive industry, intense competition, concentration of sales to two major customers, raw material price volatility, and potential environmental or product liability claims.
- Contingencies: The Company is involved in routine litigation. Management does not anticipate any material adverse effect from these proceedings. Federal tax returns for 2005 and 2006 are subject to IRS examination.
Investor Verification Checklist
- Customer Concentration: Verify the specific identity and financial health of the "two major customers" cited as a risk factor.
- Automotive Exposure: Assess the correlation between domestic automotive production forecasts and the Company's Fastener segment revenue.
- Plant Closing Completion: Confirm that the Jefferson, Iowa facility closure costs are fully settled and no further material charges are expected.
- Inventory Levels: Review the increase in inventory ($391,789 YTD) to ensure it aligns with sales demand and does not indicate obsolescence risks.
- Dividend Sustainability: Evaluate the ability to maintain the $0.36 per share dividend rate given the 2.8% decline in YTD Net Income.