Chicago Rivet & Machine Co. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2014, compared with the three months ended March 31, 2013. The company operates in two segments: fasteners, including rivets, cold-formed fasteners and screw-machine products; and assembly equipment, including automatic rivet-setting machines, parts and tools. Sales are concentrated in the automotive industry and the Midwestern United States.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $9.950 million | $9.126 million | +9.0% |
| Gross profit | $2.245 million | $2.010 million | +11.7% |
| Gross margin | 22.6% | 22.0% | +0.6 percentage points |
| Operating profit | $831,256 | $658,447 | +26.3% |
| Operating margin | 8.4% | 7.2% | +1.2 percentage points |
| Net income | $568,373 | $453,532 | +25.3% |
| Net margin | 5.7% | 5.0% | +0.7 percentage points |
| Earnings per share | $0.59 | $0.47 | +$0.12 |
| Operating cash flow | $627,410 | $(144,771) | Improved by $772,181 |
| Capital expenditures | $537,588 | $50,988 | +$486,600 |
At March 31, 2014, cash and cash equivalents were $737,073 and certificates of deposit were $5.460 million, for total cash and short-term investments of approximately $6.197 million. Working capital was approximately $15.3 million. Total assets were $29.207 million, total liabilities were $4.327 million, and shareholders’ equity was $24.879 million. The filing does not report outstanding debt or borrowings.
Cash increased by $293,465 during the quarter to $737,073. Investing cash flow was positive $226,412, primarily reflecting net proceeds from certificates of deposit, while financing cash flow was negative $560,357 due to dividends. The company paid a regular dividend of $0.18 per share and an additional $0.40 per share dividend based on 2013 results.
Material changes versus the prior comparable period
- Fastener revenue increased 9.5% to $9.088 million, representing the fourth consecutive quarter of year-over-year growth. Management attributed the increase to sales efforts and higher U.S. automotive production.
- Assembly equipment revenue increased 4.8% to $862,689, primarily from higher average selling prices for machines shipped.
- Higher volume increased fastener segment gross margin by approximately $221,000. Assembly equipment segment margins improved by approximately $14,000.
- Heating and gas expense increased approximately $61,000 because of harsh winter conditions, and depreciation increased approximately $36,000 due to recently placed equipment.
- Selling and administrative expenses increased 4.6% to $1.414 million, but declined to 14.2% of sales from 14.8%.
- Accounts receivable increased approximately $0.9 million and inventories increased approximately $0.3 million from year-end, reflecting greater activity. Accounts payable and accrued expenses increased approximately $0.8 million.
- Capital expenditures were substantially higher than in the prior-year quarter, while dividends paid increased approximately $0.4 million because of the special dividend.
Guidance, outlook, risks and unusual items
Management expressed optimism regarding fastener demand, supported by expected growth in domestic automotive sales during 2014. However, machine orders in the assembly equipment segment trailed the prior-year level as of March 31, 2014, and management expects this lower backlog to affect near-term results. No specific earnings or revenue guidance was provided.
Management believes existing cash, cash equivalents and operating cash flow will provide adequate working capital for the foreseeable future. The quarter included a $17,000 gain on equipment disposal and the $0.40-per-share additional dividend. The effective tax rate was approximately 33.8%, compared with 32.4% in the prior-year quarter.
Principal risks include dependence on the domestic automotive industry and two major customers, competition, raw-material prices and availability, labor issues, product liability, warranty and recall claims, environmental costs, loss of key employees, and difficulty achieving cost savings. The company is involved in ordinary-course litigation, including environmental claims and contract disputes; management does not expect unprovided liabilities to have a material adverse effect. Federal and state tax filings remain subject to examination, but management does not anticipate a material adjustment.
Management concluded that disclosure controls were effective as of March 31, 2014, and reported no material change in internal control over financial reporting during the quarter.
Investor verification checklist
- Verify the sustainability of automotive-driven fastener growth and the company’s exposure to its two major customers.
- Monitor assembly equipment orders and backlog, which were below the prior-year level and may pressure near-term results.
- Assess whether higher capital expenditures and working-capital requirements remain consistent with operating cash generation.
- Confirm the company’s dividend policy and ability to sustain the regular dividend following the additional 2014 dividend.
- Review customer receivables, inventory levels and valuation reserves, particularly given the automotive concentration.
- Review the annual report’s detailed risk factors, litigation disclosures, customer concentration and any debt or commitment disclosures not included in this interim filing.