Business Context and Reporting Period
Chicago Rivet & Machine Co. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2012. The company operates in two segments: fasteners and assembly equipment. It relies primarily on the domestic automotive industry and has significant customer concentration.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2012 | Three Months Ended June 30, 2011 | Six Months Ended June 30, 2012 | Six Months Ended June 30, 2011 |
|---|---|---|---|---|
| Net sales | $8.43 million | $8.13 million | $17.63 million | $15.95 million |
| Gross profit | $1.90 million | $1.93 million | $3.97 million | $3.37 million |
| Gross margin | 22.5% | 23.7% | 22.5% | 21.2% |
| Operating profit | $616,011 | $670,181 | $1.30 million | $829,684 |
| Operating margin | 7.3% | 8.2% | 7.4% | 5.2% |
| Net income | $440,432 | $587,521 | $934,166 | $704,543 |
| Net margin | 5.2% | 7.2% | 5.3% | 4.4% |
| Net income per share | $0.46 | $0.61 | $0.97 | $0.73 |
- Six-month cash flow from operating activities was $870,178, compared with cash used in operations of $136,880 in the prior-year period.
- Capital expenditures were $432,848 for the six months, compared with $663,775 in 2011. Cash dividends paid were $289,839, or $0.30 per share.
- Cash and cash equivalents were $602,336 at June 30, 2012. Certificates of deposit totaled $6.19 million, producing combined cash, cash equivalents and certificates of deposit of approximately $6.8 million.
- Working capital was approximately $15.6 million, up approximately $0.6 million from December 31, 2011. Total assets were $26.0 million and shareholders’ equity was $22.8 million.
- The balance sheet does not report debt or borrowings; the filing text does not identify any outstanding debt facilities.
- Accounts receivable increased to $5.42 million from $4.40 million at year-end, while net inventories were broadly unchanged at $5.23 million.
- Cash dividends declared increased to $0.15 per share for the quarter and $0.30 per share year to date, compared with $0.12 and $0.24, respectively, in the prior-year periods.
Material Changes Versus Prior Comparable Period
- Second-quarter sales increased 3.6%; first-half sales increased 10.5%. Management attributed the growth to improved operations and higher U.S. automotive production.
- Fastener sales increased 4.1% in the quarter and 10.6% year to date. The fastener segment recorded its eleventh consecutive quarter of year-over-year sales growth.
- Assembly equipment sales declined slightly in the second quarter but increased 10.3% for the first half, benefiting from strong first-quarter results.
- Second-quarter net income declined 25.0%, primarily because the prior-year quarter included substantially larger gains on property disposals. First-half net income increased 32.6%.
- Second-quarter gross profit declined modestly as higher labor, supplies and repair costs offset sales growth. First-half gross profit increased 17.8%.
- Selling and administrative expenses increased 1.7% in the quarter and 5.0% year to date, driven primarily by payroll, profit-sharing expense and computer-system upgrades. As a percentage of first-half sales, these expenses improved to 15.2% from 15.9%.
- Gains on disposal of property and equipment were $27,500 in the quarter and $57,500 year to date, compared with $187,073 and $189,063, respectively, in 2011. The 2011 amounts included an approximately $142,000 gain on the sale of the Jefferson, Iowa property.
Outlook, Risks, Contingencies and Unusual Items
Management stated that current cash, certificates of deposit and operating cash flow should provide adequate working capital for the foreseeable future. The company remains cautious because of a weak domestic economic recovery, high unemployment and low consumer confidence, although automotive sales projections were viewed as favorable relative to the prior year. No quantitative earnings or revenue guidance was provided.
- Key risks include dependence on the domestic automotive industry, concentration of sales to two major customers, competition, raw-material prices and availability, labor issues, product liability, warranty and recall claims, environmental compliance costs, loss of key employees and failure to achieve expected cost savings.
- The company is periodically involved in litigation, including environmental claims and contract disputes. Management believes unprovided liabilities will not materially affect financial position, but the ultimate amounts cannot currently be determined.
- Federal tax returns for 2009 through 2011 and state tax returns for 2009 through 2011 remain subject to examination. Management does not expect a material adjustment.
- Effective tax rates were approximately 32.8% for the second quarter and 32.6% for the first six months, with reductions from the federal statutory rate primarily attributed to the Domestic Production Activities Deduction.
- Management reported that disclosure controls were effective and that no material changes occurred in internal control over financial reporting during the quarter.
Investor Verification Items
- Verify whether automotive production and the company’s two major customer relationships remain sufficient to support continued sales growth.
- Monitor accounts receivable growth, customer credit exposure and cash conversion, particularly given the company’s concentration of credit risk in the automotive industry and Midwest region.
- Assess whether labor, repair, supplies and raw-material costs continue to pressure fastener-segment margins.
- Separate recurring operating performance from nonrecurring property-disposal gains when evaluating earnings trends.
- Review pending litigation, environmental matters, tax examinations and any commitments or contingencies disclosed in the company’s 2011 Form 10-K.
- Confirm that the company maintains adequate liquidity and remains free of material debt, as the filing does not report borrowings.