Business Context and Reporting Period
Chicago Rivet & Machine Co. filed this Form 10-K for the fiscal year ended December 31, 2015. The company manufactures and sells fasteners, cold-formed parts, screw-machine products, automatic rivet-setting machines, assembly equipment, tools and related parts. Operations are reported in two segments: fasteners and assembly equipment. The principal market is the North American automotive industry. The company had 234 employees and no foreign operations; foreign sales were less than 10% of total sales.
Financial Performance and Liquidity
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $36.17 million | $37.14 million | Down 2.6% |
| Net income | $1.69 million | $1.95 million | Down 13.5% |
| Earnings per share | $1.75 | $2.02 | Down $0.27 |
| Selling and administrative expense | $5.41 million | $5.44 million | Down 0.6% |
| Effective income tax rate | 33.3% | 32.9% | Up 0.4 percentage points |
| Capital expenditures | $2.10 million | $1.74 million | Increase of $0.37 million |
| Depreciation expense | $1.26 million | $1.26 million | Essentially unchanged |
Reported net profit margin was approximately 4.7% in 2015, compared with approximately 5.3% in 2014. The filing states that overall margins were fractionally lower, principally because of lower fastener volume, reduced labor efficiency and higher health insurance expense, partly offset by favorable raw-material prices and lower tooling costs.
- Fastener revenue was $32.59 million, down 4.5% from $34.12 million. The decline reflected lower export sales, including an approximately $700,000 reduction in shipments to China, and the end of production for certain automotive parts.
- Assembly equipment revenue was $3.58 million, up 18.7% from $3.02 million, driven by more machines shipped and higher sales of tools and machine parts.
- Working capital was approximately $16.1 million at year-end, up approximately $0.1 million. Inventory declined approximately $0.6 million, partly offset by a $0.4 million increase in unearned revenue.
- Cash, cash equivalents and certificates of deposit totaled $7.4 million at year-end, up approximately $1.1 million.
- Investing activity consisted primarily of $2.1 million of capital expenditures. Financing activity consisted of approximately $0.9 million of dividend payments.
- The filing does not provide a clear total operating cash flow value in the supplied text. It also does not identify outstanding debt; management states that current cash, cash equivalents and operating cash flow should cover working-capital needs for the next twelve months.
- The company had no off-balance-sheet financing arrangements and reported no material environmental costs or liabilities at the filing date.
Material Changes Versus the Prior Comparable Period
- Consolidated sales declined 2.6% and net income declined 13.5% year over year.
- The fastener segment experienced its first sales decline after five consecutive years of growth; its gross margin decreased by $651,598 for the full year.
- The assembly equipment segment improved materially, with revenue increasing 18.7% and segment margin improving by $241,910.
- Selling and administrative expense decreased slightly, but increased as a percentage of sales to 15.0% from 14.6%.
- Capital investment increased, including $696,246 for expansion of the H & L Tool manufacturing plant and $455,139 of assembly-equipment segment additions, primarily for a new horizontal machining center.
- The company paid regular dividends of $0.72 per share and an additional $0.25 per share during 2015, for total distributions of $0.97 per share.
Guidance, Outlook, Risks and Unusual Items
Management expected U.S. automobile and light-truck sales to remain at record levels in 2016, supported by employment, financing conditions and lower gasoline prices. This was viewed as favorable for the fastener segment, although weakness was expected to continue in certain foreign markets. The near-term assembly equipment outlook was favorable based on current backlog, while cautious customer capital spending and generally tepid economic growth were identified as concerns for the second half of 2016.
Management planned continued investment in production capacity and efficiency, customer development and more complex parts. The filing provides no formal revenue or earnings guidance.
- Sales are concentrated in the automotive industry and are cyclical. Two customers represented approximately 33% of consolidated revenue in both 2015 and 2014: TI Group Automotive Systems, LLC represented 21% of 2015 revenue and Fisher & Company represented 12%.
- Competition is intense, including from larger international suppliers with lower labor, health-care and regulatory costs.
- Steel and other raw-material prices and availability may affect results; customers may resist price increases over the life of a part.
- Export exposure includes economic, political and foreign-exchange risks, with China weakness already affecting 2015 sales.
- Automotive or supplier labor stoppages, product liability or warranty claims, recalls, environmental liabilities and loss of key personnel could adversely affect results.
- The common stock is thinly traded, with average daily volume below 7,500 shares in 2015, creating potential liquidity and price-volatility risks for investors.
- Routine litigation and environmental claims existed, but management believed unprovided liabilities would not materially affect financial position.
Important Facts for Investors to Verify
- Review the incorporated 2015 Annual Report for complete balance-sheet, cash-flow, debt and segment-margin details, which are not fully reproduced in the supplied filing text.
- Assess the sustainability of automotive demand and the effect of continued weakness in foreign markets, particularly China.
- Monitor customer concentration, production-life transitions for automotive parts and the risk of losing material business from either major customer.
- Evaluate whether recent capital investments generate the expected capacity, efficiency and profitability improvements.
- Confirm the company’s dividend capacity, including the recurring regular dividend and the separate extra dividend.
- Consider raw-material, health-insurance, labor-efficiency and other operating-cost pressures that could further reduce margins.