Chicago Rivet & Machine Co. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three and nine months ended September 30, 2011. The company operates in two segments: fasteners, including cold-formed parts, rivets and screw-machine products; and assembly equipment, including automatic rivet-setting machines, parts and tools. Sales are concentrated primarily in the automotive industry and the Midwestern United States.
Financial Performance and Position
| Metric | Three Months 2011 | Three Months 2010 | Nine Months 2011 | Nine Months 2010 |
|---|---|---|---|---|
| Net sales | $7.822 million | $6.950 million | $23.770 million | $21.650 million |
| Gross profit | $1.746 million | $1.278 million | $5.120 million | $4.454 million |
| Operating profit | $457,446 | $138,639 | $1.287 million | $758,930 |
| Net income | $317,640 | $105,993 | $1.022 million | $559,922 |
| Net income per share | $0.33 | $0.11 | $1.06 | $0.58 |
- Third-quarter revenue increased 12.5%; nine-month revenue increased 9.8%.
- Calculated consolidated gross margin was approximately 22.3% in the quarter and 21.5% year to date, compared with 18.4% and 20.6%, respectively, in the prior periods.
- Calculated net margin was approximately 4.1% in the quarter and 4.3% year to date, compared with 1.5% and 2.6% in the comparable periods.
- Fastener sales increased 13.8% in the quarter and 11.8% year to date. Assembly equipment sales increased 3.5% in the quarter but declined 5.1% year to date.
- Cash flow from operations was $551,745 for the first nine months, down from $1.099 million in 2010. Capital expenditures were $993,200, compared with $345,322 in the prior-year period.
- Cash and cash equivalents totaled $409,452 at September 30, 2011. Certificates of deposit totaled $6.320 million, resulting in cash, cash equivalents and certificates of deposit of approximately $6.7 million.
- Working capital was approximately $15.2 million, up about $0.6 million from year-end. Total assets were $25.200 million and total shareholders’ equity was $22.037 million.
- No borrowings or long-term debt are reported in the condensed balance sheet. Total liabilities were $3.163 million, primarily current operating liabilities and deferred taxes.
- Cash dividends declared were $0.12 per share for the quarter and $0.36 per share year to date, compared with $0.10 and $0.30, respectively, in 2010.
Material Changes Versus the Prior Comparable Period
- Profitability improved substantially as higher sales and cost-control efforts more than offset higher raw-material costs. Operating profit increased 230% in the quarter and 69.6% year to date.
- Steel prices were 9.8% higher in the quarter and 9.1% higher year to date; non-ferrous material costs also increased, although some relief was reported recently.
- Selling and administrative expenses increased 13.1% in the quarter and 3.7% year to date. Increases included payroll, commissions, profit sharing, maintenance and a $26,000 computer-system upgrade cost.
- Accounts receivable increased $1.319 million and inventories increased $519,000 from year-end, reflecting higher sales, material prices and quantities held for increased activity. Accounts payable and accrued wages also increased.
- Year-to-date investing activity included approximately $1.0 million of capital expenditures and $413,190 of proceeds from property and equipment sales. The company recorded a year-to-date gain of $189,863 on property and equipment disposals, including a gain on the sale of its former Jefferson, Iowa property.
Guidance, Outlook, Risks and Unusual Items
Management provided no quantitative earnings or revenue guidance. Management expressed encouragement regarding improved sales and net income and stated that it intends to pursue profitable growth, efficiency improvements and prudent operational investments. Management believes available cash, certificates of deposit and operating cash flow will provide adequate working capital for the foreseeable future.
- Economic conditions remain weak, including high unemployment and weak consumer confidence.
- Material costs remain a significant concern because some customer contracts limit the company’s ability to pass through raw-material increases.
- Key risks include domestic automotive-industry conditions, intense competition, concentration of sales with two major customers, raw-material price and availability, labor issues, 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, although the ultimate amounts cannot currently be established.
- Federal tax returns for 2008–2010 and state returns for 2008–2010 remain subject to examination. Management does not expect a material effect from examinations.
- Management concluded that disclosure controls were effective and reported no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Whether fastener-sector growth and improved margins are sustainable despite automotive concentration and raw-material inflation.
- The timing and magnitude of customer price adjustments under contracts that may limit raw-material cost recovery.
- Whether working-capital investment in receivables and inventories converts into operating cash flow.
- The recurring earnings impact of the property-disposal gain and other unusual items included in year-to-date results.
- Customer concentration, automotive production trends and the status of litigation, environmental matters and tax examinations.
- Whether increased capital expenditures and the computer-system upgrade produce the expected operational benefits.