Exhibit 13
Chicago Rivet & Machine Co.
2016 Annual Report
Highlights
| | | | | | | | |
| | | 2016 | | | 2015 | |
| | |
Net Sales | | $ | 37,022,378 | | | $ | 36,174,604 | |
| | |
Net Income | | | 2,356,980 | | | | 1,687,641 | |
| | |
Net Income Per Share | | | 2.44 | | | | 1.75 | |
| | |
Dividends Per Share | | | .99 | | | | .97 | |
| | |
Net Cash Provided by Operating Activities | | | 4,027,182 | | | | 4,090,193 | |
| | |
Expenditures for Property, Plant and Equipment | | | 2,027,860 | | | | 2,104,267 | |
| | |
Working Capital | | | 16,469,451 | | | | 15,687,057 | |
| | |
Total Shareholders’ Equity | | | 27,891,925 | | | | 26,491,416 | |
| | |
Common Shares Outstanding atYear-End | | | 966,132 | | | | 966,132 | |
| | |
Shareholders’ Equity Per Common Share | | | 28.87 | | | | 27.42 | |
Annual Meeting
The annual meeting of shareholders
will be held on May 9, 2017 at 10:00 a.m. at
901 Frontenac Road
Naperville, Illinois
Chicago Rivet & Machine Co.•901 Frontenac Road•Naperville, Illinois 60563 • www.chicagorivet.com
Management’s Report
on Financial Condition and Results of Operations
To Our Shareholders:
RESULTS OF OPERATIONS
Financial results for 2016 were very positive, with both operating segments recording increases in sales while net income improved by an impressive 39.7% compared to 2015. Overall, net sales in 2016 were $37,022,378 compared to $36,174,604 in 2015, an increase of $847,774, or 2.3%. Net income for 2016 was $2,356,980, or $2.44 per share, compared to $1,687,641, or $1.75 per share, in 2015.
2016 Compared to 2015
Fastener segment revenues were $7,731,434 in the fourth quarter of 2016, a decline of $28,399, or 0.4%, from $7,759,833 in the fourth quarter of 2015. Fastener segment revenues for the full year were $33,126,599 in 2016 compared with $32,590,015 in 2015, an increase of $536,584, or 1.6%. Our fastener segment, which relies on the automotive sector for the majority of its revenues, was supported by modest growth in domestic automobile and light truck sales during 2016. In addition to the increase in sales, segment margins were further improved by favorable raw material prices during the year and a $141,000 reduction in tooling expense, contributing to a net increase in gross margin for the fastener segment of $329,235 in the fourth quarter and $1,144,067 for the full year of 2016 compared to 2015.
Assembly equipment segment revenues were $1,019,545 in the fourth quarter of 2016, an increase of $113,011, or 12.5%, compared to the fourth quarter of 2015, when revenues were $906,534. For the full year 2016, assembly equipment segment revenues were $3,895,779, an increase of $311,190, or 8.7%, compared to $3,584,589 reported in 2015. The increase in fourth quarter and full year sales was the result of an increase in the number and average selling price of machines shipped compared to the prior year periods. These gains were partially offset by lower tools and machine parts sales during 2016. The net increase in assembly equipment segment sales in the fourth quarter resulted in an improvement in segment margins of $46,634, while the increase in margins for the year was limited to $2,615 due to a less favorable overall sales mix.
Selling and administrative expenses were $5,559,436 in 2016, compared to $5,408,281 in 2015, an increase of $151,155, or 2.8%. The change is primarily due to an increase in profit sharing expense of $111,037, related to greater operating profit. As a percentage of net sales, selling and administrative expenses were unchanged at 15% in 2016 compared to 2015.
Other income was $65,255 in 2016 compared to $44,443 in 2015. Other income is comprised primarily of interest income which increased during the year due to rising interest rates and greater amounts invested in certificates of deposit compared to the prior year.
The Company’s effective income tax rates were 33.6% and 33.3% in 2016 and 2015, respectively. Rates were lower than the U.S. federal statutory rate primarily due to the Domestic Production Activities Deduction allowed under Internal Revenue Code Section 199.
DIVIDENDS
In determining to pay dividends, the Board considers current profitability, the outlook for longer-term profitability, known and potential cash requirements and the overall financial condition of the Company. In November 2016, the quarterly dividend was increased from $.18 per share to $.20 per share. The Company paid four regular quarterly dividends totaling $.74 per share during 2016. In addition, an extra dividend of $.25 per share was paid during the first quarter, bringing the total distribution for the year to $.99 per share. On February 20, 2017, the Board of Directors declared a regular quarterly dividend of $.20 per share, payable March 20, 2017 to shareholders of record on March 3, 2017. This continues the uninterrupted record of consecutive quarterly dividends paid by the Company to its shareholders that extends over 83 years. At that same meeting, the Board also declared an extra dividend of $.35 per share payable March 20, 2017 to shareholders of record on March 3, 2017.
PROPERTY, PLANT AND EQUIPMENT
Total capital expenditures in 2016 were $2,027,860. Fastener segment additions accounted for $1,683,953 of the total, including $758,467 for the substantial completion of the H & L Tool building expansion that was begun in 2015. Cold heading and screw machine equipment additions totaled $180,818 while secondary processing equipment totaled $301,932. Inspection equipment comprised $247,330 of the fastener segment additions and the remaining additions of $195,406 were for various general plant equipment. Assembly equipment segment additions in 2016 were $189,568, for production equipment. Investments for the benefit of both operating segments, primarily for building improvements, totaled $154,339 during 2016.
Capital expenditures during 2015 totaled $2,104,267, of which $1,545,533 related to investments in our fastener operations. The expansion of our H & L Tool manufacturing
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Management’s Report
(Continued)
plant, undertaken to increase capacity and improve production efficiency, totaled $696,246. Cold heading and screw machine equipment comprised $416,268 of the fastener segment additions, $333,395 was expended for equipment used in performing secondary operations on parts and quality control and the remaining $99,624 relates to general plant equipment. Assembly equipment segment additions totaled $455,139, primarily for the installation of a newstate-of-the-art horizontal machining center. Additional investments of $103,595 for technology upgrades and building improvements were made in 2015 that benefit both operating segments.
Depreciation expense amounted to $1,242,357 in 2016 and $1,261,446 in 2015.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at December 31, 2016 was approximately $16.5 million, an increase of $.8 million from the beginning of the year. The most significant factor in the change was the net increase in cash and certificates of deposit as a result of more profitable operations in 2016. The Company’s holdings in cash, cash equivalents and certificates of deposit amounted to $8.4 million at the end of 2016, an increase of $1 million. The Company’s investing activities in 2016 consisted primarily of capital expenditures of $2 million. The only financing activity during 2016 was the payment of approximately $1 million in dividends.
Management believes that current cash, cash equivalents and operating cash flow will be sufficient to provide adequate working capital for the next twelve months.
Off-Balance Sheet Arrangements
The Company has not entered into, and has no current plans to enter into, anyoff-balance sheet financing arrangements.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of revenue and expenses during the reporting period. A summary of critical accounting policies can be found in Note 1 of the financial statements.
NEW ACCOUNTING STANDARDS
The Company’s financial statements and financial condition were not, and are not expected to be, materially impacted by new, or proposed, accounting standards. A summary of recent accounting pronouncements can be found in Note 1 of the financial statements.
OUTLOOK FOR 2017
With U.S. auto and light truck sales posting strong gains in December 2016, it was not surprising that 2017 started with the first January decline in retail light vehicle sales since 2010. However, many forecasts call for 2017 sales to be near the record levels achieved the last two years due to the anticipated improvement in the economy if potential economic stimulus and deregulation initiatives are enacted. This environment is favorable to our fastener segment which derives the majority of its revenue from the automotive sector. While recent demand for products in our assembly equipment segment remains stable, due to the particularly strong sales reported in the first half of 2016, achieving similar results for that segment in early 2017 will be difficult.
In addition to the increase in sales during 2016, our margins benefited from lower raw material prices compared to the year earlier period. Predicting the direction of commodities prices is difficult due to the many factors impacting them and prices have had periods of volatility in the past. Increases in costs can be difficult to recover in some of the markets we serve as many of our customers expect prices to be held constant over the multi-year life of a part. Accordingly, we will continue our efforts to improve operational efficiency as a means of improving margins.
Over the last six years, we have invested $12.1 million in equipment and facilities upgrades in order to increase our capabilities, expand production capacity and improve operating efficiency. These investments, which we feel are necessary to remain competitive, have been made possible by our consistent profitability during that period. That profitability has also allowed us to pay dividends of $4.9 million over the last six years and declare an additional special dividend of $.3 million, to be paid in the first quarter of 2017, based on the results in 2016. As in the past, we will continue our efforts to develop new customer relationships and build on existing ones in all the markets we serve by emphasizing our experience, quality and customer service in a very competitive global marketplace.
The positive results in the past year would not have been possible without the dedicated efforts of our
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Management’s Report
(Continued)
employees, who consistently work to meet the ever-changing challenges that characterize today’s manufacturing environment. We are grateful for their contributions to our efforts towards continual improvement
as well as the loyalty of our customers, who have placed their confidence in us to help them achieve their goals. We also take this opportunity to acknowledge our shareholders for their support.
Respectfully,
| | |
 | |  |
| |
| John A. Morrissey | | Michael J. Bourg |
| Chairman | | President |
March 20, 2017
FORWARD-LOOKING STATEMENTS
This discussion contains certain “forward-looking statements” which are inherently subject to risks and uncertainties that may cause actual events to differ materially from those discussed herein. Factors which may cause such differences in events include, those disclosed under “Risk Factors” in our Annual Report on Form10-K and in the other filings we make with the United States Securities and Exchange Commission. These factors, include among other things: conditions in the domestic automotive industry, upon which we rely for sales revenue, the intense competition in our markets, the concentration of our sales to two major customers, risks related to export sales, the price and availability of raw materials, labor relations issues, losses related to product liability, warranty and recall claims, costs relating to environmental laws and regulations, and the loss of the services of our key employees. Many of these factors are beyond our ability to control or predict. Readers are cautioned not to place undue reliance on these forward-looking statements. We undertake no obligation to publish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
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Consolidated Balance Sheets
| | | | | | | | |
| December 31 | | 2016 | | | 2015 | |
| | |
Assets | | | | | | | | |
Current Assets | | | | | | | | |
Cash and Cash Equivalents | | $ | 353,475 | | | $ | 800,894 | |
Certificates of Deposit | | | 8,059,000 | | | | 6,565,000 | |
Accounts Receivable – Less allowances of $150,000 | | | 5,323,519 | | | | 5,438,332 | |
Inventories, net | | | 4,537,693 | | | | 4,538,212 | |
Prepaid Income Taxes | | | 56,112 | | | | 273,112 | |
Other Current Assets | | | 423,952 | | | | 383,953 | |
| | | | | | | | |
Total Current Assets | | | 18,753,751 | | | | 17,999,503 | |
Property, Plant and Equipment, net | | | 12,450,558 | | | | 11,698,443 | |
| | | | | | | | |
Total Assets | | $ | 31,204,309 | | | $ | 29,697,946 | |
| | | | | | | | |
Liabilities and Shareholders’ Equity | | | | | | | | |
Current Liabilities | | | | | | | | |
Accounts Payable | | $ | 703,467 | | | $ | 768,111 | |
Accrued Wages and Salaries | | | 690,526 | | | | 611,484 | |
Other Accrued Expenses | | | 604,174 | | | | 465,662 | |
Unearned Revenue and Customer Deposits | | | 286,133 | | | | 467,189 | |
| | | | | | | | |
Total Current Liabilities | | | 2,284,300 | | | | 2,312,446 | |
Deferred Income Taxes, net | | | 1,028,084 | | | | 894,084 | |
| | | | | | | | |
Total Liabilities | | | 3,312,384 | | | | 3,206,530 | |
| | | | | | | | |
| Commitments and Contingencies (Note 7) | | | | | | | | |
Shareholders’ Equity | | | | | | | | |
Preferred Stock, No Par Value, | | | | | | | | |
500,000 Shares Authorized: None Outstanding | | | — | | | | — | |
Common Stock, $1.00 Par Value, 4,000,000 Shares Authorized: 1,138,096 Shares Issued, 966,132 Shares Outstanding | | | 1,138,096 | | | | 1,138,096 | |
Additional Paid-in Capital | | | 447,134 | | | | 447,134 | |
Retained Earnings | | | 30,228,793 | | | | 28,828,284 | |
Treasury Stock, 171,964 Shares at cost | | | (3,922,098 | ) | | | (3,922,098 | ) |
| | | | | | | | |
Total Shareholders’ Equity | | | 27,891,925 | | | | 26,491,416 | |
| | | | | | | | |
Total Liabilities and Shareholders’ Equity | | $ | 31,204,309 | | | $ | 29,697,946 | |
| | | | | | | | |
The accompanying notes are an integral part of the Consolidated Financial Statements.
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Consolidated Statements of Income
| | | | | | | | |
| For the Years Ended December 31 | | 2016 | | | 2015 | |
| | |
Net Sales | | $ | 37,022,378 | | | $ | 36,174,604 | |
Cost of Goods Sold | | | 27,980,217 | | | | 28,279,125 | |
| | | | | | | | |
Gross Profit | | | 9,042,161 | | | | 7,895,479 | |
Selling and Administrative Expenses | | | 5,559,436 | | | | 5,408,281 | |
| | | | | | | | |
Operating Profit | | | 3,482,725 | | | | 2,487,198 | |
Other Income | | | 65,255 | | | | 44,443 | |
| | | | | | | | |
Income Before Income Taxes | | | 3,547,980 | | | | 2,531,641 | |
Provision for Income Taxes | | | 1,191,000 | | | | 844,000 | |
| | | | | | | | |
Net Income | | $ | 2,356,980 | | | $ | 1,687,641 | |
| | | | | | | | |
Net Income Per Share | | $ | 2.44 | | | $ | 1.75 | |
| | | | | | | | |
Consolidated Statements of Retained Earnings
| | | | | | | | |
| For the Years Ended December 31 | | 2016 | | | 2015 | |
| | |
Retained Earnings at Beginning of Year | | $ | 28,828,284 | | | $ | 28,077,791 | |
Net Income | | | 2,356,980 | | | | 1,687,641 | |
Cash Dividends Paid, $.99 and $.97 Per Share in 2016 and 2015, respectively | | | (956,471 | ) | | | (937,148 | ) |
| | | | | | | | |
Retained Earnings at End of Year | | $ | 30,228,793 | | | $ | 28,828,284 | |
| | | | | | | | |
The accompanying notes are an integral part of the Consolidated Financial Statements.
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Consolidated Statements of Cash Flows
| | | | | | | | |
| For the Years Ended December 31 | | 2016 | | | 2015 | |
| | |
Cash Flows from Operating Activities: | | | | | | | | |
Net Income | | $ | 2,356,980 | | | $ | 1,687,641 | |
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities: | | | | | | | | |
Depreciation and Amortization | | | 1,242,357 | | | | 1,261,446 | |
Loss on the Sale of Equipment | | | 29,658 | | | | 17,504 | |
Deferred Income Taxes | | | 134,000 | | | | 233,000 | |
Changes in Operating Assets and Liabilities: | | | | | | | | |
Accounts Receivable, net | | | 114,813 | | | | 231,322 | |
Inventories, net | | | 519 | | | | 624,262 | |
Other Current Assets | | | 177,001 | | | | (134,996 | ) |
Accounts Payable | | | (64,644 | ) | | | (178,703 | ) |
Accrued Wages and Salaries | | | 79,042 | | | | 6,455 | |
Other Accrued Expenses | | | 138,512 | | | | (55,061 | ) |
Unearned Revenue and Customer Deposits | | | (181,056 | ) | | | 397,323 | |
| | | | | | | | |
Net Cash Provided by Operating Activities | | | 4,027,182 | | | | 4,090,193 | |
| | | | | | | | |
Cash Flows from Investing Activities: | | | | | | | | |
Capital Expenditures | | | (2,027,860 | ) | | | (2,081,272 | ) |
Proceeds from the Sale of Equipment | | | 3,730 | | | | 4,869 | |
Proceeds from Certificates of Deposit | | | 6,225,000 | | | | 7,303,000 | |
Purchases of Certificates of Deposit | | | (7,719,000 | ) | | | (7,810,000 | ) |
| | | | | | | | |
Net Cash Used in Investing Activities | | | (3,518,130 | ) | | | (2,583,403 | ) |
| | | | | | | | |
Cash Flows from Financing Activities: | | | | | | | | |
Cash Dividends Paid | | | (956,471 | ) | | | (937,148 | ) |
| | | | | | | | |
Net Cash Used in Financing Activities | | | (956,471 | ) | | | (937,148 | ) |
| | | | | | | | |
Net Increase (Decrease) in Cash and Cash Equivalents | | | (447,419 | ) | | | 569,642 | |
Cash and Cash Equivalents: | | | | | | | | |
Beginning of Year | | | 800,894 | | | | 231,252 | |
| | | | | | | | |
End of Year | | $ | 353,475 | | | $ | 800,894 | |
| | | | | | | | |
Net Cash Paid for Income Taxes | | $ | 840,000 | | | $ | 710,456 | |
| | |
Supplemental Schedule ofNon-cash Investing Activities: | | | | | | | | |
Capital Expenditures in Accounts Payable | | $ | — | | | $ | 22,995 | |
The accompanying notes are an integral part of the Consolidated Financial Statements.
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Notes to Consolidated
Financial Statements
1—Nature of Business and Significant Accounting Policies
Nature of Business—The Company operates in the fastener industry and is in the business of producing and selling rivets, cold-formed fasteners and parts, screw machine products, automatic rivet setting machines and parts and tools for such machines.
A summary of the Company’s significant accounting policies follows:
Principles of Consolidation—The consolidated financial statements include the accounts of Chicago Rivet & Machine Co. and its wholly-owned subsidiary, H & L Tool Company, Inc. (“H & L Tool”). All significant intercompany accounts and transactions have been eliminated.
Revenue Recognition—Revenues from product sales are recognized upon shipment and an allowance is provided for estimated returns and discounts based on experience. Cash received by the Company prior to shipment is recorded as unearned revenue. The Company experiences a certain degree of sales returns that varies over time. The Company is able to make a reasonable estimation of expected sales returns based upon history. The Company records all shipping and handling fees billed to customers as revenue, and related costs as cost of sales, when incurred.
Credit Risk—The Company extends credit on the basis of terms that are customary within our markets to various companies doing business primarily in the automotive industry. The Company has a concentration of credit risk primarily within the automotive industry and in the Midwestern United States. The Company has established an allowance for accounts that may become uncollectible in the future. This estimated allowance is based primarily on management’s evaluation of the financial condition of the customer and historical experience. The Company monitors its accounts receivable and charges to expense an amount equal to its estimate of potential credit losses. The Company considers a number of factors in determining its estimates, including the length of time its trade accounts receivable are past due, the Company’s previous loss history and the customer’s current ability to pay its obligation. Accounts receivable balances are charged off against the allowance when it is determined that the receivable will not be recovered.
Cash and Cash Equivalents and Certificates of Deposit—The Company considers all highly liquid
investments, including certificates of deposit, with a maturity of three months or less when purchased to be cash equivalents. Certificates of deposit with an original maturity of greater than three months are separately presented at cost which approximates market value. The Company maintains cash on deposit in several financial institutions. At times, the account balances may be in excess of Federal Deposit Insurance Corporation insured limits.
Fair Value of Financial Instruments—The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, certificates of deposit, accounts receivable and accounts payable approximate fair value based on their short term nature.
Inventories—Inventories are stated at the lower of cost or net realizable value, cost being determined by thefirst-in,first-out method. The value of inventories is reduced for estimated excess and obsolete inventories based on a review ofon-hand inventories compared to historical and estimated future sales and usage.
Property, Plant and Equipment—Properties are stated at cost and are depreciated over their estimated useful lives using thestraight-line method for financial reporting purposes. Accelerated methods of depreciation are used for income tax purposes. Direct costs related to developing or obtaining software for internal use are capitalized as property and equipment. Capitalized software costs are amortized over the software’s useful life when the software is placed in service. The estimated useful lives by asset category are:
| | | | |
| Asset category | | Estimated useful life | |
Land improvements | | | 15 to 25 years | |
Buildings and improvements | | | 10 to 35 years | |
Machinery and equipment | | | 7 to 15 years | |
Capitalized software costs | | | 3 to 5 years | |
Other equipment | | | 3 to 15 years | |
The Company reviews the carrying value of property, plant and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. There were no triggering events requiring assessment of impairment as of December 31, 2016 and 2015.
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When properties are retired or sold, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss on disposition is recognized in current operations. Maintenance, repairs and minor betterments that do not improve the related asset or extend its useful life are charged to operations as incurred.
Income Taxes—Deferred income taxes are determined under the asset and liability method. Deferred income taxes arise from temporary differences between the income tax basis of assets and liabilities and their reported amounts in the financial statements. Deferred taxes are shown on the balance sheet as a net long-term asset or liability.
The Company applies a comprehensive model for the financial statement recognition, measurement, classification and disclosure of uncertain tax positions. In the first step of thetwo-step process, the Company evaluates the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. In the second step, the Company measures the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. As of December 31, 2016 and 2015, the Company determined that there are no uncertain tax positions with a more than 50% likelihood of being realized upon settlement.
The Company classifies interest and penalties related to unrecognized tax benefits as a component of income tax expense. There were no such expenses in 2016 or 2015.
The Company’s federal income tax returns for the 2013 through 2015 tax years are subject to examination by the Internal Revenue Service (“IRS”). While it may be possible that a reduction could occur with respect to the Company’s unrecognized tax benefits as an outcome of an IRS examination, management does not anticipate any adjustments that would result in a material change to the results of operations or financial condition of the Company.
No statutes have been extended on any of the Company’s federal income tax filings. The statute of limitations on the Company’s 2013, 2014 and 2015 federal income tax returns will expire on September 15, 2017, 2018 and 2019, respectively.
The Company’s state income tax returns for the 2013 through 2015 tax years are subject to examination by various state authorities with the latest closing period on October 31, 2019. The Company is currently not under examination by any state authority for income tax purposes and no statutes for state income tax filings have been extended.
Segment Information—The Company reports segment information based on the internal structure and reporting of the Company’s operations.
Net Income Per Share—Net income per share of common stock is based on the weighted average number of shares outstanding of 966,132 in 2016 and 2015.
Use of Estimates—The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Significant items subject to estimates and assumptions include depreciable lives, deferred taxes and valuation allowances for accounts receivable and inventory obsolescence. Actual results could differ from those estimates.
Reclassifications—Certain items in 2015 have been reclassified to conform to the presentation in 2016. These changes have no effect on net income or the financial position of the Company.
Recent Accounting Pronouncements—In November 2015, the Financial Accounting Standards Board issued Accounting Standards Update No. 2015-17 “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”) to simplify the presentation of deferred income taxes. Under this update, all deferred income tax assets and liabilities, along with any related valuation allowance, are required to be classified as noncurrent on the balance sheet. Effective January 1, 2016, the Company early adopted ASU No. 2015-17 and retrospectively reclassified $425,191 of current deferred income tax assets to long-term deferred income tax liability on the December 31, 2015 consolidated balance sheet.
In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (”ASU”)No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” This ASU includes specific guidance to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The ASU is effective for annual reporting periods beginning after December 15, 2017 and interim periods within those annual periods. The Company does not expect the adoption of this ASU to have a significant impact on the consolidated financial statements.
In February 2016, the FASB issued ASUNo. 2016-02, “Leases (Topic 842).” The ASU will increase transparency and comparability among entities by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU will require lessees to recognize in the balance sheet a liability to make lease payments (the lease liability) and aright-of-use asset representing its right to use the underlying asset for the lease term. The ASU is effective for annual reporting periods beginning after December 15, 2018 and interim periods within those annual periods. The impact of adopting this ASU is not expected to be significant based on current lease agreements.
In May 2014, the FASB issued ASUNo. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in
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exchange for those goods or services. The guidance in this ASU supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition,” and most industry-specific guidance. In May 2016, the FASB issued ASU2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” (“ASU2016-12”), which updated ASU2014-09. ASU2016-12 clarifies certain core recognition principles including collectability, sales tax presentation, noncash consideration, contract modifications and completed contracts at transition and disclosures no longer required if the full retrospective transition method is adopted. ASU2014-09 and ASU2016-12 are effective for annual reporting periods after December 15, 2017 and interim periods within those reporting periods, and are to be applied using either the modified retrospective or full retrospective transition methods, with early adoption permitted. The Company has reviewed its revenue sources and contracts within the scope of the ASU and based on its evaluation to date, does not anticipate this standard will have a material impact on its consolidated financial statements. The Company does not plan to early adopt the ASU and has not yet determined the transition method.
2—Balance Sheet Details
| | | | | | | | |
| | | 2016 | | | 2015 | |
Inventories: | | | | | | | | |
Raw materials | | $ | 1,675,143 | | | $ | 1,923,932 | |
Work in process | | | 1,684,321 | | | | 1,606,389 | |
Finished goods | | | 1,740,229 | | | | 1,584,891 | |
| | | | | | | | |
| | | 5,099,693 | | | | 5,115,212 | |
Valuation reserves | | | (562,000 | ) | | | (577,000 | ) |
| | | | | | | | |
| | $ | 4,537,693 | | | $ | 4,538,212 | |
| | | | | | | | |
| | |
Property, Plant and Equipment, net: | | | | | | | | |
Land and improvements | | $ | 1,424,689 | | | $ | 1,281,982 | |
Buildings and improvements | | | 7,908,780 | | | | 7,271,006 | |
Machinery and equipment | | | 32,559,468 | | | | 32,020,937 | |
Capitalized software and other | | | 1,312,887 | | | | 1,274,592 | |
| | | | | | | | |
| | | 43,205,824 | | | | 41,848,517 | |
Accumulated depreciation | | | (30,755,266 | ) | | | (30,150,074 | ) |
| | | | | | | | |
| | $ | 12,450,558 | | | $ | 11,698,443 | |
| | | | | | | | |
| | |
Other Accrued Expenses: | | | | | | | | |
Profit sharing plan contribution | | $ | 384,275 | | | $ | 273,238 | |
Property taxes | | | 92,044 | | | | 92,526 | |
All other items | | | 127,855 | | | | 99,898 | |
| | | | | | | | |
| | $ | 604,174 | | | $ | 465,662 | |
| | | | | | | | |
| | |
Allowance for Doubtful Accounts: | | | | | | | | |
Balance at beginning of year | | $ | 150,000 | | | $ | 150,000 | |
Charges to statement of income | | | 1,566 | | | | 3,824 | |
Write-offs | | | (1,566 | ) | | | (3,824 | ) |
| | | | | | | | |
Balance at end of year | | $ | 150,000 | | | $ | 150,000 | |
| | | | | | | | |
| | | | | | | | |
| | | 2016 | | | 2015 | |
| | |
Inventory Valuation Reserves: | | | | | | | | |
Balance at beginning of year | | $ | 577,000 | | | $ | 618,000 | |
Charges to statement of income | | | 80,793 | | | | 77,577 | |
Write-offs | | | (95,793 | ) | | | (118,577 | ) |
| | | | | | | | |
Balance at end of year | | $ | 562,000 | | | $ | 577,000 | |
| | | | | | | | |
3—Income Taxes—The provision for income tax expense consists of the following:
| | | | | | | | |
| | | 2016 | | | 2015 | |
Current: | | | | | | | | |
Federal | | $ | 1,005,000 | | | $ | 576,000 | |
State | | | 52,000 | | | | 35,000 | |
Deferred | | | 134,000 | | | | 233,000 | |
| | | | | | | | |
| | $ | 1,191,000 | | | $ | 844,000 | |
| | | | | | | | |
The following is a reconciliation of the statutory federal income tax rate to the actual effective tax rate:
| | | | | | | | | | | | | | | | |
| | | 2016 | | | 2015 | |
| | | Amount | | | % | | | Amount | | | % | |
Expected tax at U.S. statutory rate | | $ | 1,206,000 | | | | 34.0 | | | $ | 861,000 | | | | 34.0 | |
Permanent differences | | | (49,000 | ) | | | (1.4 | ) | | | (40,000 | ) | | | (1.6 | ) |
State taxes, net of federal benefit | | | 34,000 | | | | 1.0 | | | | 23,000 | | | | 0.9 | |
| | | | | | | | | | | | | | | | |
Income tax expense | | $ | 1,191,000 | | | | 33.6 | | | $ | 844,000 | | | | 33.3 | |
| | | | | | | | | | | | | | | | |
The Company’s effective tax rates were lower than the U.S. federal statutory rate in 2016 and 2015 primarily due to the Domestic Production Activities Deduction allowed under Internal Revenue Code Section 199.
The deferred tax assets (liabilities) consist of the following:
| | | | | | | | |
| | | 2016 | | | 2015 | |
Depreciation and amortization | | $ | (1,432,275 | ) | | $ | (1,319,275 | ) |
Inventory | | | 240,647 | | | | 263,723 | |
Accrued vacation | | | 110,246 | | | | 109,193 | |
Allowance for doubtful accounts | | | 53,625 | | | | 53,625 | |
Other, net | | | (327 | ) | | | (1,350 | ) |
| | | | | | | | |
| | $ | (1,028,084 | ) | | $ | (894,084 | ) |
| | | | | | | | |
Valuation allowances related to deferred taxes are recorded based on the “more likely than not” realization criteria. The Company reviews the need for a valuation allowance on a quarterly basis for each of its tax jurisdictions. A deferred tax valuation allowance was not required at December 31, 2016 or 2015.
4—Profit Sharing Plan—The Company has a noncontributory profit sharing plan covering substantially all employees. Total expenses relating to the profit sharing plan amounted to approximately $384,000 in 2016 and $273,000 in 2015.
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5—Other Income—consists of the following:
| | | | | | | | |
| | | 2016 | | | 2015 | |
Interest income | | $ | 41,880 | | | $ | 26,544 | |
Other | | | 23,375 | | | | 17,899 | |
| | | | | | | | |
| | $ | 65,255 | | | $ | 44,443 | |
| | | | | | | | |
6—Segment Information—The Company operates, primarily in the United States, in two business segments as determined by its products. The fastener segment, which comprises H & L Tool and the parent company’s fastener operations, includes rivets, cold-formed fasteners and parts and screw machine products. The assembly equipment segment includes automatic rivet setting machines and parts and tools for such machines. Information by segment is as follows:
| | | | | | | | | | | | | | | | |
| | | Fastener | | | Assembly
Equipment | | | Other | | | Consolidated | |
Year Ended December 31, 2016: | | | | | | | | | | | | | | | | |
Net sales | | $ | 33,126,599 | | | $ | 3,895,779 | | | $ | — | | | $ | 37,022,378 | |
Depreciation | | | 1,078,281 | | | | 93,876 | | | | 70,200 | | | | 1,242,357 | |
Segment operating profit | | | 4,689,749 | | | | 1,350,277 | | | | — | | | | 6,040,026 | |
Selling and administrative
expenses | | | | | | | | | | | (2,557,301 | ) | | | (2,557,301 | ) |
Other income | | | | | | | | | | | 65,255 | | | | 65,255 | |
| | | | | | | | | | | | | | | | |
Income before income taxes | | | | | | | | | | | | | | | 3,547,980 | |
| | | | | | | | | | | | | | | | |
Capital expenditures | | | 1,683,953 | | | | 189,568 | | | | 154,339 | | | | 2,027,860 | |
Segment assets: | | | | | | | | | | | | | | | | |
Accounts receivable, net | | | 5,036,251 | | | | 287,268 | | | | — | | | | 5,323,519 | |
Inventories, net | | | 3,639,940 | | | | 897,753 | | | | — | | | | 4,537,693 | |
Property, plant and equipment, net | | | 10,282,847 | | | | 1,564,702 | | | | 603,009 | | | | 12,450,558 | |
Other assets | | | — | | | | — | | | | 8,892,539 | | | | 8,892,539 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 31,204,309 | |
| | | | | | | | | | | | | | | | |
Year Ended December 31, 2015: | | | | | | | | | | | | | | | | |
Net sales | | $ | 32,590,015 | | | $ | 3,584,589 | | | $ | — | | | $ | 36,174,604 | |
Depreciation | | | 1,101,210 | | | | 80,191 | | | | 80,045 | | | | 1,261,446 | |
Segment operating profit | | | 3,692,805 | | | | 981,326 | | | | — | | | | 4,674,131 | |
Selling and administrative
expenses | | | | | | | | | | | (2,186,933 | ) | | | (2,186,933 | ) |
Other income | | | | | | | | | | | 44,443 | | | | 44,443 | |
| | | | | | | | | | | | | | | | |
Income before income taxes | | | | | | | | | | | | | | | 2,531,641 | |
| | | | | | | | | | | | | | | | |
Capital expenditures | | | 1,545,533 | | | | 455,139 | | | | 103,595 | | | | 2,104,267 | |
Segment assets: | | | | | | | | | | | | | | | | |
Accounts receivable, net | | | 5,084,535 | | | | 353,797 | | | | — | | | | 5,438,332 | |
Inventories, net | | | 3,549,655 | | | | 988,557 | | | | — | | | | 4,538,212 | |
Property, plant and equipment, net | | | 9,732,333 | | | | 1,469,010 | | | | 497,100 | | | | 11,698,443 | |
Other assets | | | — | | | | — | | | | 8,022,959 | | | | 8,022,959 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 29,697,946 | |
| | | | | | | | | | | | | | | | |
The Company does not allocate certain selling and administrative expenses for internal reporting, thus, no allocation was made for these expenses for segment disclosure purposes. Segment assets reported internally are limited to accounts receivable, inventory and long-lived assets. Certain long-lived assets of one plant location are allocated between the two segments based on estimated plant utilization, as this plant serves both fastener and assembly equipment activities. Other assets are not allocated to segments internally and to do so would be impracticable. Sales to two customers in the fastener segment accounted for 19 and 21 percent and 12 and 12 percent of consolidated revenues during 2016 and 2015, respectively. The accounts receivable balances for these customers accounted for 22 and 26 percent of consolidated accounts receivable for the larger customer and 12 and 13 percent for the other customer as of December 31, 2016 and 2015, respectively.
7—Commitments and Contingencies—The Company recorded rent expense aggregating approximately $26,000 for both 2016 and 2015. Total future minimum rentals at December 31, 2016 are not significant.
The Company is, from time to time involved in litigation, including environmental claims, in the normal course of business. While it is not possible at this time to establish the ultimate amount of liability with respect to contingent liabilities, including those related to legal proceedings, management is of the opinion that the aggregate amount of any such liabilities, for which provision has not been made, will not have a material adverse effect on the Company’s financial position.
8—Subsequent Events—On February 20, 2017, the Board of Directors declared a regular quarterly dividend of $.20 per share, or $193,226, and an extra dividend of $.35 per share, or $338,146, payable March 20, 2017 to shareholders of record on March 3, 2017.
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Chicago Rivet & Machine Co.
We have audited the accompanying consolidated balance sheets of Chicago Rivet & Machine Co. and subsidiary (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of income, retained earnings and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2016 and 2015, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
Crowe Horwath LLP
Oak Brook, Illinois
March 20, 2017
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INFORMATION ON COMPANY’S COMMON STOCK
The Company’s common stock is traded on the NYSE MKT (trading privileges only, not registered.) The ticker symbol is CVR.
At December 31, 2016, there were approximately 160 shareholders of record.
The transfer agent and registrar for the Company’s common stock is:
Continental Stock Transfer & Trust Company
17 Battery Place
New York, New York 10004
The following table shows the dividends declared and the quarterly high and low prices of the common stock for the last two years.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Dividends
Declared | | | Market Range | |
Quarter | | 2016 | | | 2015 | | | 2016 | | | 2015 | |
First* | | $ | .43 | | | $ | .43 | | | $ | 25.00 | | | $ | 23.10 | | | $ | 35.50 | | | $ | 27.95 | |
Second | | | .18 | | | | .18 | | | $ | 29.00 | | | $ | 23.66 | | | $ | 32.89 | | | $ | 27.80 | |
Third | | | .18 | | | | .18 | | | $ | 29.59 | | | $ | 26.40 | | | $ | 29.68 | | | $ | 24.07 | |
Fourth | | | .20 | | | | .18 | | | $ | 42.00 | | | $ | 26.05 | | | $ | 27.00 | | | $ | 22.00 | |
| * | Includes an extra dividend of $.25 per share in both 2016 and 2015. |
BOARD OF DIRECTORS
John A. Morrissey (e)
Chairman of the Board
of the Company
Chairman of the Board of
Algonquin State Bank, N.A.
Algonquin, Illinois
Michael J. Bourg (e)
President of the Company
Edward L. Chott (a) (c) (n)
Chairman of the Board of
The Broaster Co.
Beloit, Wisconsin
Kent H. Cooney (a)
Chief Financial Officer of
Heldon Bay Limited Partnership
Bigfork, Montana
William T. Divane, Jr. (a) (c) (n)
Chairman of the Board and
Chief Executive Officer of
Divane Bros. Electric Co.
Franklin Park, Illinois
Walter W. Morrissey (e)
Attorney at Law
Lillig & Thorsness, Ltd.
Oak Brook, Illinois
John L. Showel (n)
Portfolio Manager
Maggiore Fund I, LP
Chicago, Illinois
| (a) | Member of Audit Committee |
| (c) | Member of Compensation Committee |
| (e) | Member of Executive Committee |
| (n) | Member of Nominating Committee |
CORPORATE OFFICERS
John A. Morrissey
Chairman, Chief
Executive Officer
Michael J. Bourg
President, Chief Operating
Officer and Treasurer
Kimberly A. Kirhofer
Secretary
CHICAGO RIVET & MACHINE CO.
Administrative & Sales Offices
Naperville, Illinois
Pembroke, Massachusetts
Manufacturing Facilities
Albia Division
Albia, Iowa
Tyrone Division
Tyrone, Pennsylvania
H & L Tool Company, Inc.
Madison Heights, Michigan
Chicago Rivet & Machine Co.•901 Frontenac Road•Naperville, Illinois 60563 • www.chicagorivet.com
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Chicago Rivet & Machine Co.•901 Frontenac Road•Naperville, Illinois 60563 • www.chicagorivet.com
