CVR Chicago Rivet and Machine Co

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Results of Operations

Net sales for the third quarter of 2022 were $8,567,785 compared to $8,555,731 in the third quarter of 2021, an increase of $12,054, or 0.1%. As of September 30, 2022, year to date sales totaled $26,788,879 compared to $26,225,070, for the first three quarters of 2021, an increase of $563,809, or 2.1%.  Net income for the third quarter of 2022 was $3,579,060, or $3.71 per share compared to $172,659, or $0.18 per share in the third quarter of 2021.  Net income for the first three quarters of 2022 was $4,180,277, or $4.33 per share, compared to net income of $1,032,294, or $1.07 per share, for the same period in 2021. The increase in net income in the third quarter and year-to-date was primarily due to a $4,738,394 gain on the sale of our Naperville property which was completed on September 27, 2022.  

Fastener segment revenues were $7,805,622 in the third quarter of 2022 compared to $7,552,619 reported in the third quarter of 2021, an increase of $253,003, or 3.3%.  For the first three quarters of 2022, fastener segment revenues were $24,019,067 compared to $22,843,341 for the same period in 2021, an increase of $1,175,726, or 5.1%. The automotive sector is the primary market for our fastener segment products and sales to automotive customers were $4,813,646 in the third quarter this year compared to $4,259,544 in the third quarter of 2021, an increase of $554,102, or 13.0%.  Sales to automotive customers for the first nine months of 2022 were $14,268,638 compared to $13,410,100 for the first nine months of 2021, an increase of $858,538, or 6.4%.  North American light vehicle production and sales have improved over 2021, but continue to be constrained by shortages of critical components.  Fastener segment sales to non-automotive customers were $2,991,976 for the third quarter of 2022 compared to $3,293,075 in the third quarter of 2021, a $301,099 decline.  Sales to non-automotive customers for the first three quarters of 2022 were $9,750,429 compared to $9,433,241 in the year earlier period, an increase of $317,188, or 3.4%.  The overall increase in fastener segment sales during the third quarter and year-to-date was offset by higher operating costs as historically high inflation continued to negatively impact raw material, labor and most other operating costs.  As a result, third quarter fastener segment gross profit was $972,363 compared to $1,195,425 in 2021, a decline of $220,764.  On a year-to-date basis, fastener segment gross profit was $3,722,743 compared to $4,113,646 for the first three quarters of 2021, a decline of $388,605.

Assembly equipment segment revenues were $762,163 in the third quarter of 2022 compared to $1,003,112 in the third quarter of 2021, a decline of $240,949, or 24.0%.  For the first nine months of 2022, assembly equipment segment revenues were $2,769,812 compared to $3,381,729 for the same period of 2021, a decline of $611,917, or 18.1%.  The third quarter and year-to-date decline in revenue was primarily due to fewer machines sold and a lower average selling price on machines sold in the current year, as the first three quarters of 2021 included a number of high-dollar value specialty machines.  Lower sales, along with higher operating costs, contributed to a decline in segment gross profit for the quarter and the first nine months of 2022.  Assembly equipment segment gross profit for the third quarter of 2022 was $147,545 compared to $290,606 in the third quarter of 2021, a decline of $143,061.  For the first three quarters of 2022, gross profit was $699,764 compared to $1,083,899 in 2021, a decline of $384,135. 

    Selling and administrative expenses for the third quarter of 2022 were $1,250,385 compared to $1,290,046 in the third quarter of 2021, a reduction of $39,661, or 3.1%.  While salaries were approximately $50,000 lower in the current year quarter, that reduction was offset by a $69,000 increase in profit sharing expense. For the first nine months of 2022, selling and administrative expenses were $3,809,970 compared to $3,936,995 for the same period in 2021, a decrease of $127,025, or 3.2%.  The net reduction in the first three quarters of 2022 primarily relates to a reduction in salaries of approximately $137,000 which was only partially offset by an increase of $44,000 in outside consulting, related to recruiting and technology services, and a $40,000 increase in profit sharing expense.  Selling and administrative expenses as a percentage of net sales for the first nine months of 2022 were reduced to 14.2%, from 15.0% for the first nine months of 2021. 

As previously disclosed in a Current Report on Form 8-K filed on September 30, 2022, we sold our Naperville, Illinois facility in which the Company’s headquarters and warehouse space is located for a selling price of $5,350,000 in cash, less customary closing costs.  Concurrently with the completion of the sale, the Company entered into a lease agreement with the purchaser pursuant to which the Company will lease the warehouse portion of the Naperville facility from the purchaser until December 31, 2022 and the office portion until June 30, 2023.  The monthly rent payable by the Company under the Lease is $12,500 for the period from the closing until December 31, 2022 and $8,500 for the period from January 1, 2023 to June 30, 2023.  The sale was undertaken in order to take advantage of favorable market conditions and begin the process of relocating to a more suitable sized facility.

Other Income

Other income in the third quarter of 2022 was $13,143, compared to $11,674 in the third quarter of 2021.  The increase was primarily due to higher interest rates in recent months on certificates of deposit.  Other income for the first three quarters of 2022 was $35,346 compared to $43,744 in the same period of 2021.  The year-to-date decline was primarily due to a reduction in interest income due to lower average balances invested in the current year.

Income Tax Expense

The Company’s effective tax rates were approximately 22.5% and 16.9% for the third quarter of 2022 and 2021, respectively.  The Company’s effective tax rates were approximately 22.4% and 20.9% for the nine months ended September 30, 2022 and 2021, respectively.

Liquidity and Capital Resources

Working capital improved to $21,504,425 as of September 30, 2022 from $17,421,585 at the beginning of the year.  The improvement was primarily due to the gain realized on the sale of our Naperville property during the third quarter.  During the first three quarters of 2022, accounts receivable increased by $930,130, due to the greater sales activity compared to the fourth quarter of 2021, and inventory increased by $1,401,692 due to higher raw material prices and an increase in quantities on hand to minimize supply disruptions.  Partially offsetting these changes is an increase in income taxes payable related to the gain on the sale of property.  Other items reducing working capital in 2022 were capital expenditures of $696,073, which consisted primarily of equipment used in fastener production activities, and dividends paid of $637,647.  These changes and other cash flow activity resulted in a balance of cash, cash equivalents and short-term investments of $8,069,732 as of September 30, 2022 compared to $4,777,954 as of the beginning of the year.  Management believes that current cash, cash equivalents and operating cash flow will provide adequate working capital for the next twelve months.

Results of Operations Summary

Overall customer demand remained positive during the third quarter despite sporadic constraints from some of our automotive customers related to their critical parts shortages.  We have experienced higher operating costs related to historically high inflation and ongoing supply chain disruptions that has negatively impacted operating results.  Cost increases can be difficult to recover and are expected to persist while supply imbalances persist.  Just as significant, the tight labor market has made it difficult to maintain proper staffing and has resulted in less efficient operations and unmet customer demand.  These factors are expected to continue to present challenges in the near-term.  Rising interest rates have further unsettled the economic outlook.  As we face these challenges, we will make adjustments to our activities as market conditions dictate, including continuing our efforts to optimize staffing in order to improve operating efficiencies, while pursuing opportunities beneficial to operating results.

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 Form 10-K and in the other filings we make with the United States Securities and Exchange Commission.  These factors, include among other things: risk related to the COVID-19 pandemic and its related adverse effects, conditions in the domestic automotive industry, upon which we rely for sales revenue, the intense competition in our markets, the concentration of our sales with major customers, risks related to export sales, the price and availability of raw materials, supply chain disruptions, labor relations issues, losses related to product liability, warranty and recall claims, costs relating to environmental laws and regulations, information systems disruptions, the loss of the services of our key employees and difficulties in achieving cost savings.  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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CHICAGO RIVET & MACHINE CO.