Chicago Rivet & Machine Co. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2016. The financial statements are unaudited. The company operates in two segments: fasteners and assembly equipment.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $9.82 million | $9.21 million | $19.42 million | $18.49 million |
| Gross profit | $2.61 million | $2.25 million | $5.04 million | $4.34 million |
| Operating profit | $1.16 million | $0.84 million | $2.13 million | $1.51 million |
| Net income | $795,059 | $570,961 | $1.44 million | $1.03 million |
| Net income per share | $0.82 | $0.59 | $1.49 | $1.07 |
- Q2 gross margin was approximately 26.6%, operating margin 11.8%, and net margin 8.1%. Six-month margins were approximately 26.0%, 11.0%, and 7.4%, respectively.
- Six-month operating cash flow was $1.63 million, compared with $2.09 million in the prior-year period. Capital expenditures were $936,111, and dividends paid were $589,341.
- Cash and cash equivalents were $907,384 at June 30, 2016. Certificates of deposit totaled $6.57 million, resulting in approximately $7.47 million of cash and short-term investment balances.
- Working capital was approximately $16.2 million. Current assets were $19.06 million and current liabilities were $2.87 million.
- Total assets were $31.09 million and shareholders’ equity was $27.34 million. The balance sheet reports no borrowings or other interest-bearing debt.
- Accounts receivable increased to $6.28 million from $5.44 million at year-end, and inventories increased to $4.99 million from $4.54 million.
Material changes versus the prior comparable periods
- Q2 sales increased 6.7%; six-month sales increased 5.0%.
- Q2 net income increased 39.2%, while six-month net income increased 39.5%. Management attributed the improvement primarily to higher sales, a more profitable sales mix, and favorable raw-material prices.
- Fastener sales increased 7.0% in Q2 and 3.8% for the first half. Fastener gross margin improved by $402,550 in Q2 and $647,056 year to date.
- Assembly equipment sales increased 3.5% in Q2 and 16.5% year to date, primarily because more machines were shipped. Tools and parts sales declined, reducing Q2 segment gross margin by $41,150; first-half segment gross margin nevertheless increased by $49,096.
- Selling and administrative expenses rose 2.9% in Q2 and 2.6% year to date, primarily because of higher profit-sharing expense tied to improved operating results.
- Dividends declared were $0.18 per share in Q2 and $0.61 per share for the first half, unchanged from the comparable periods.
- The company early adopted ASU 2015-17, resulting in the retrospective reclassification of $425,191 of current deferred tax assets to noncurrent deferred tax liabilities at December 31, 2015.
Outlook, risks, contingencies, and unusual items
- No quantitative financial guidance was provided.
- Management stated that the automotive market remains healthy but growth slowed in the first half and may have plateaued. Automotive demand is the primary driver of the fastener segment.
- Management reported that assembly-equipment machine demand remained favorable but had abated somewhat in recent months.
- Lower raw-material prices benefited margins but could reverse quickly and may be difficult to offset.
- Management expects cash, certificates of deposit, and operating cash flow to provide adequate working capital for the next twelve months.
- The company invested approximately $0.9 million in equipment and facility improvements during 2016 to support competitiveness and growth.
- Disclosed risks include automotive-industry conditions, intense competition, customer concentration involving two major customers, raw-material prices and availability, labor issues, product liability and warranty or recall claims, environmental costs, loss of key employees, and difficulties achieving expected cost savings.
- The company is involved from time to time in litigation, including environmental claims and contract disputes. Management does not believe unprovided liabilities will materially affect financial position.
- Federal tax returns for 2012 through 2015 and state tax returns for 2012 through 2015 remain subject to examination; management does not anticipate a material impact.
- Management concluded that disclosure controls were effective and reported no material changes to internal control over financial reporting.
Key facts for investors to verify
- Whether automotive-sector growth has plateaued and how that affects fastener demand.
- Whether favorable raw-material prices persist and continue supporting gross margins.
- The sustainability of recent assembly-equipment machine shipments amid the reported moderation in demand.
- Customer concentration, including the extent of sales attributable to the two major customers.
- Trends in accounts receivable, inventory, and operating cash conversion.
- Capital spending requirements and the company’s ability to maintain dividends while funding equipment improvements.
- Any developments in litigation, environmental matters, product liability claims, or tax examinations.