Business Context and Reporting Period
Chicago Rivet & Machine Co. filed this Form 10-K for the fiscal year ended December 31, 2012. The company operates in two segments: fasteners and assembly equipment. Its principal market is the North American automotive industry, with smaller exposure to non-automotive customers. The company had 228 employees and no foreign operations at year-end.
Key Financial Metrics
- Revenue: $34.2 million, up 10.7% from $30.9 million in 2011 and the highest level in five years.
- Net income: $1.75 million, compared with $1.25 million in 2011; diluted earnings per share were $1.81 versus $1.30.
- Net margin: approximately 5.1%, compared with approximately 4.1% in 2011.
- Fastener segment revenue: $31.0 million, up 11.4%; segment gross margin increased by $866,485.
- Assembly equipment revenue: $3.2 million, up 4.6%; segment gross margin increased by $135,393.
- Selling and administrative expense: $5.19 million, up 3.0%; declined to 15.2% of sales from 16.3%.
- Capital expenditures: $1.19 million, down from $1.61 million in 2011. Depreciation was $993,951.
- Liquidity: Working capital was approximately $15.9 million, up $0.9 million. Cash, cash equivalents and certificates of deposit totaled $7.5 million, also up $0.9 million.
- Cash flow and debt: The filing states that operating cash flow was sufficient for working capital needs, but the provided filing text does not give a clear operating cash flow amount. No debt balance is disclosed in the provided text.
- Dividends: Four regular quarterly dividends of $0.15 per share plus a $0.30 special dividend produced total 2012 distributions of $0.90 per share, or approximately $0.9 million.
Material Changes Versus 2011
- Revenue increased primarily because U.S. automotive production reached its highest level since 2007 and sales to certain non-automotive customers increased.
- Net income rose approximately 39%, benefiting from higher volume and improved segment gross margins.
- Raw material prices were elevated early in the year but moderated as the year progressed. Steel and other input-cost volatility remained a concern.
- Other income declined to $118,099 from $249,804, largely because 2011 included an approximately $142,000 gain from selling a former Iowa facility.
- Accounts receivable increased approximately $0.2 million, inventory declined approximately $0.3 million, and current liabilities were little changed.
- Capital spending decreased by approximately $424,000, although the company continued investing in inspection, cold-heading, screw-machine and other production equipment.
Outlook, Risks and Unusual Items
Management expected modest economic growth in 2013 and low-single-digit automotive sales growth. The fastener segment was expected to benefit from that environment, while assembly equipment could lag if business sentiment remained weak. Management also cited uncertainty regarding government economic policy and deficits.
Cost inflation and volatility in raw materials, supplies, fuel and insurance could pressure profitability because cost increases may be difficult to recover through pricing. Management plans to mitigate these pressures through disciplined quoting and operational efficiency, while pursuing new customers and more complex parts.
- Two customers represented approximately 33% of consolidated revenue in both 2012 and 2011; the largest represented approximately 18% of 2012 revenue and the second approximately 15%.
- Demand is highly dependent on the cyclical domestic automotive industry and intense global competition.
- Other risks include steel availability and pricing, customer or supplier labor disruptions, product liability and warranty claims, recalls, environmental obligations, and loss of key personnel.
- Legal proceedings occur in the ordinary course; management believes unprovided liabilities will not materially affect financial position.
- The company reported no off-balance-sheet financing arrangements and stated that no material accounting-standard changes were expected.
- The board declared a further regular dividend of $0.15 per share payable March 20, 2013.
- Management reported effective disclosure controls and internal control over financial reporting as of December 31, 2012.
Investor Verification Items
- Verify the consolidated statements of cash flows, including operating cash flow and free cash flow, in the incorporated 2012 Annual Report.
- Confirm the company’s total debt, if any, and the detailed liquidity and investment balances from the consolidated balance sheet.
- Review segment gross profit, operating income and margin calculations, since the provided MD&A gives changes in gross margin but not complete segment margin figures.
- Assess customer concentration and the potential impact of losing or reducing business with the two major customers.
- Evaluate sensitivity to automotive production, steel prices, wage and benefit costs, and other input-cost volatility.
- Review dividend sustainability against operating cash flow, capital expenditure requirements and future automotive demand.
- Consider the limited trading liquidity of the common stock; average daily volume in 2012 was below 3,000 shares, with some days showing no trading.