Business Context and Reporting Period
Chicago Rivet & Machine Co. filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2011. 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 among two major customers.
Financial Highlights
| Metric | Three Months Ended June 30, 2011 | Three Months Ended June 30, 2010 | Six Months Ended June 30, 2011 | Six Months Ended June 30, 2010 |
|---|---|---|---|---|
| Net sales | $8.13 million | $7.94 million | $15.95 million | $14.70 million |
| Gross profit | $1.93 million | $1.91 million | $3.37 million | $3.18 million |
| Operating profit | $0.67 million | $0.59 million | $0.83 million | $0.62 million |
| Net income | $0.59 million | $0.42 million | $0.70 million | $0.45 million |
| Diluted or reported EPS | $0.61 | $0.43 | $0.73 | $0.47 |
Calculated margins were approximately 23.7% gross, 8.2% operating and 7.2% net in the second quarter, compared with approximately 24.1%, 7.4% and 5.3%, respectively, in the prior-year quarter. For the six-month periods, calculated margins were approximately 21.1% gross, 5.2% operating and 4.4% net, compared with approximately 21.6%, 4.2% and 3.1% in 2010.
- Second-quarter fastener sales increased 4.9% to $7.31 million; six-month sales increased 10.8% to $14.42 million.
- Second-quarter assembly equipment sales declined 14.9% to $0.83 million; six-month sales declined 9.5% to $1.53 million.
- Second-quarter selling and administrative expense declined 4.8% to $1.26 million. Six-month expense declined 0.5% to $2.54 million, or 15.9% of sales versus 17.4% in 2010.
- Cash flow from operations was negative $136,880 for the first six months, compared with $343,604 provided in the prior-year period.
- Investing activities provided $908,615, principally from certificate-of-deposit maturities and asset-sale proceeds, partially offset by $663,775 of capital expenditures.
- Cash and cash equivalents increased to $1.27 million from $0.73 million at December 31, 2010. Cash, cash equivalents and certificates of deposit totaled approximately $6.49 million at June 30, 2011, compared with approximately $7.11 million at year-end.
- Total current assets were $17.11 million and current liabilities were $2.09 million, producing working capital of approximately $15.0 million.
- The balance sheet shows no debt or borrowings. Total liabilities were $2.78 million and shareholders’ equity was $21.84 million at June 30, 2011.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales rose 2.5% and first-half sales rose 8.5%, continuing the reported improvement in operating results.
- Net income increased 39.9% in the second quarter and 55.2% for the first six months; EPS increased from $0.43 to $0.61 and from $0.47 to $0.73, respectively.
- Fastener performance improved, although U.S. automotive production was affected by supply-chain disruptions following the March 2011 earthquake in Japan.
- Assembly equipment revenue declined because the prior-year quarter included a large replacement-parts order and the current period lacked high-dollar specialty-machine sales. The number of machines shipped increased year over year.
- Steel prices increased 5.2% year over year in the second quarter and 8.7% for the first six months. Non-ferrous material prices increased by an even greater percentage, according to management.
- The company recognized approximately $142,000 of gain on the sale of its Jefferson, Iowa property and approximately $45,000 on the sale of underutilized manufacturing equipment.
- Accounts receivable increased approximately $1.0 million and inventories increased approximately $0.6 million from year-end, contributing to negative operating cash flow.
- Cash dividends declared increased to $0.12 per share for the quarter and $0.24 per share for the first six months, versus $0.10 and $0.20, respectively, in 2010.
Guidance, Outlook, Risks and Unusual Items
Management expects the effects of the Japan-related automotive supply-chain disruptions to recede in the third quarter, potentially benefiting fastener sales through pent-up demand and inventory rebuilding. Management remains cautious because of higher steel and non-ferrous material costs, sluggish economic recovery, high unemployment and weak consumer and business confidence. No quantitative 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 company states that it will continue investing in the business and pursuing operating improvements.
- Key risks include dependence on the domestic automotive industry, concentration of sales with two major customers, competition, raw-material price and availability, labor relations, product liability, warranty and recall claims, environmental costs, loss of key employees and failure to achieve expected cost savings.
- The company is involved from time to time in litigation, including environmental claims and contract disputes. Management believes unprovided liabilities will not materially adversely affect financial position, but the ultimate amounts are not determinable from the filing.
- Federal tax returns for 2008 through 2010 remain subject to IRS examination, and state returns for 2008 through 2010 remain subject to examination by various state authorities. Management does not expect a material adjustment.
- Effective tax rates were approximately 32.7% in the second quarter and 32.9% for the first six months, with reductions from the statutory federal rate primarily attributed to the Domestic Production Activities Deduction.
- Management assessed disclosure controls and procedures as effective and reported no material changes to internal control over financial reporting during the quarter.
Investor Verification Items
- Verify the sustainability of fastener sales growth and the expected third-quarter recovery from automotive supply-chain disruptions.
- Assess whether steel and non-ferrous material inflation can be passed through to customers without further margin pressure.
- Monitor assembly equipment orders, specialty-machine demand and the effect of the prior-year replacement-parts comparison.
- Reconcile negative operating cash flow with higher receivables and inventories, and evaluate working-capital requirements.
- Confirm the recurring versus nonrecurring nature of the approximately $187,000 aggregate property and equipment disposal gains.
- Review customer concentration, automotive exposure, litigation and environmental contingencies, and pending federal and state tax examinations.