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- Revenue is recognized when control of the promised goods or services is transferred to our customers, generally upon shipment of goods or completion of services, in an amount that reflects the consideration we expect to receive in exchange for those goods or services. Sales taxes we may collect concurrent with revenue producing activities are excluded from revenue. Revenue is recognized net of certain sales adjustments to arrive at net sales as reported on the statement of income. These adjustments primarily relate to customer returns and allowances, which vary over time. The Company records a liability and reduction in sales for estimated product returns based upon historical experience. If we determine that our obligation under warranty claims is probable and subject to reasonable determination, an estimate of that liability is recorded as an offset against revenue at that time. As of December 31, 2022 and 2021, reserves for warranty claims were not material. Cash received by the Company prior to shipment is recorded as unearned revenue. In 2022 and 2021 the Company recognized revenue from such payments of $302,357 and $248,799, respectively, that was included in the unearned revenue balance at the beginning of the period. Shipping and handling fees billed to customers are recognized in net sales, 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 U.S. Treasury bills and 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 the first-in, first-out method. The value of inventories is reduced for estimated excess and obsolete inventories based on a review of on-hand inventories compared to historical and estimated future sales and usage.
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Property, Plant and Equipment-Properties are stated at cost and are depreciated over their estimated useful lives using the straight-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 40 years |
Buildings and improvements…… |
10 to 40 years |
Machinery and equipment……… |
5 to 18 years |
Capitalized software costs……… |
3 to 5 years |
Other equipment………………… |
3 to 10 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, 2022 and 2021.
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 the two-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, 2022 and 2021, 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 2022 or 2021.
The Company’s federal income tax returns for the 2019 through 2021 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 2019, 2020 and 2021 federal income tax returns will expire on September 15, 2023, 2024 and 2025, respectively.
The Company’s state income tax returns for the 2019 through 2021 tax years are subject to examination by various state authorities with the latest closing period on October 31, 2025. 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.
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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 2022 and 2021.
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.
Recent Accounting Pronouncements- In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and in November 2018 issued an amendment, ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses. ASU 2016-13 amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. ASU 2016-13 and ASU 2018-19 should be applied on either a prospective transition or modified-retrospective approach depending on the subtopic. ASU 2016-13 is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. The Company adopted this ASU on January 1, 2023. The impact of the adoption on our consolidated financial statements was not material.
2 - Balance Sheet Details
|
December 31, 2022 |
December 31, 2021 |
Inventories: |
|
|
Raw materials |
$ 4,460,071 |
$ 4,645,923 |
Work in process |
2,747,427 |
2,181,457 |
Finished goods |
2,534,732 |
2,304,400 |
|
9,742,230 |
9,131,780 |
Valuation reserves |
(621,000) |
(612,000) |
|
$ 9,121,230 |
$ 8,519,780 |
|
December 31, 2022 |
December 31, 2021 |
Property, Plant and Equipment, net: |
|
|
Land and improvements |
$ 1,510,513 |
$ 1,778,819 |
Buildings and improvements |
6,818,066 |
8,456,983 |
Machinery and equipment |
35,982,194 |
35,618,735 |
Capitalized software and other |
1,038,768 |
1,060,379 |
|
45,349,541 |
46,914,916 |
Accumulated depreciation |
(33,487,748) |
(34,441,052) |
|
$ 11,861,793 |
$ 12,473,864 |
21
|
December 31, 2022 |
December 31, 2021 |
Other Accrued Expenses: |
|
|
Profit sharing plan contribution |
$ 170,000 |
$ 145,000 |
Property taxes |
41,497 |
80,269 |
All other items |
116,464 |
141,149 |
|
$ 327,961 |
$ 366,418 |
|
December 31, 2022 |
December 31, 2021 |
Allowance for Doubtful Accounts: |
|
|
Balance at beginning of year |
$ 170,000 |
$ 170,000 |
Charges to statement of income |
(1,660) |
0 |
Write-offs, net of recoveries |
(8,340) |
0 |
Balance at end of year |
$ 160,000 |
$ 170,000 |
|
December 31, 2022 |
December 31, 2021 |
Inventory Valuation Reserves: |
|
|
Balance at beginning of year |
$ 612,000 |
$ 600,000 |
Charges to statement of income |
17,070 |
41,308 |
Write-offs |
(8,070) |
(29,308) |
Balance at end of year |
$ 621,000 |
$ 612,000 |
3 - Income Taxes—The provision for income tax expense consists of the following:
|
2022 |
2021 |
Current: |
|
|
Federal |
$ 723,000 |
$ 378,000 |
State |
40,000 |
8,000 |
Deferred |
22,000 |
(85,000) |
|
$ 785,000 |
$ 301,000 |
The following is a reconciliation of the statutory federal income tax rate to the actual effective tax rate:
|
2022 |
|
2021 |
|
Amount |
|
% |
|
Amount |
|
% |
Expected tax at U.S. statutory rate |
$ 767,000 |
|
21.0 |
|
$ 297,000 |
|
21.0 |
Permanent differences |
(14,000) |
|
(0.4) |
|
(2,000) |
|
(0.1) |
State taxes, net of federal benefit |
32,000 |
|
0.9 |
|
6,000 |
|
0.4 |
Income tax expense |
$ 785,000 |
|
21.5 |
|
$ 301,000 |
|
21.3 |
22
The deferred tax assets (liabilities) consist of the following:
|
2022 |
|
2021 |
|
|
|
|
Depreciation and amortization |
$ (1,216,451) |
|
$ (1,196,119) |
Inventory |
157,687 |
|
157,600 |
Accrued vacation |
71,923 |
|
74,037 |
Allowance for doubtful accounts |
38,250 |
|
38,250 |
Other, net |
507 |
|
148 |
|
$ (948,084) |
|
$ (926,084) |
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, 2022 or 2021.
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 $170,000 in 2022 and $145,000 in 2021.
5 - Other Income- consists of the following:
|
2022 |
|
2021 |
Interest income |
$ 55,333 |
|
$ 19,797 |
Other |
36,100 |
|
35,760 |
|
$ 91,433 |
|
$ 55,557 |
6 - Segment Information- The Company operates 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, 2022: |
|
|
|
|
Net Sales……………………………………… |
$ 30,291,547 |
$ 3,354,486 |
$ 0 |
$ 33,646,033 |
|
|
|
|
|
Depreciation……………………………………... |
1,129,151 |
133,615 |
17,104 |
1,279,870 |
|
|
|
|
|
Segment operating profit……………………… |
505,751 |
413,995 |
0 |
919,746 |
Selling and administrative expenses………….. |
0 |
0 |
(2,096,944) |
(2,096,944) |
Gain on sale of property………………………… |
|
|
4,738,394 |
4,738,394 |
Other income…………………………………….. |
0 |
0 |
91,433 |
91,433 |
Income before income taxes…………………… |
|
|
|
3,652,629 |
|
|
|
|
|
Capital expenditures……………………………. |
868,654 |
3,207 |
98,082 |
969,943 |
|
|
|
|
|
Segment assets: |
|
|
|
|
Accounts receivable, net……………………... |
4,683,620 |
291,517 |
0 |
4,975,137 |
Inventories, net………………………………... |
7,766,703 |
1,354,527 |
0 |
9,121,230 |
Property, plant and equipment, net…………. |
9,562,329 |
1,303,497 |
995,967 |
11,861,793 |
Other assets…………………………………… |
0 |
0 |
7,667,967 |
7,667,967 |
|
|
|
|
33,626,127 |
|
|
|
|
|
Year Ended December 31, 2021: |
|
|
|
|
Net Sales……………………………………… |
$ 29,831,388 |
$ 4,143,170 |
$ 0 |
$ 33,974,558 |
|
|
|
|
|
Depreciation……………………………………... |
1,161,596 |
134,957 |
22,001 |
1,318,554 |
|
|
|
|
|
Segment operating profit……………………… |
2,384,486 |
997,048 |
0 |
3,381,534 |
Selling and administrative expenses………….. |
0 |
0 |
(2,022,619) |
(2,022,619) |
Other income…………………………………….. |
0 |
0 |
55,557 |
55,557 |
Income before income taxes…………………… |
|
|
|
1,414,472 |
|
|
|
|
|
Capital expenditures……………………………. |
493,564 |
0 |
177,334 |
670,898 |
|
|
|
|
|
Segment assets: |
|
|
|
|
Accounts receivable, net……………………... |
5,302,257 |
345,727 |
0 |
5,647,984 |
Inventories, net………………………………... |
7,214,050 |
1,305,730 |
0 |
8,519,780 |
Property, plant and equipment, net…………. |
9,782,324 |
1,433,905 |
1,257,635 |
12,473,864 |
Other assets…………………………………… |
0 |
0 |
5,124,630 |
5,124,630 |
|
|
|
|
31,766,258 |
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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.
The following table presents revenue by segment, further disaggregated by end-market:
|
Fastener |
Assembly Equipment |
Consolidated |
Year Ended December 31, 2022: |
|
|
|
Automotive |
$ 18,454,238 |
$ 209,735 |
$ 18,663,973 |
Non-automotive |
11,837,309 |
3,144,751 |
14,982,060 |
Total net sales |
$ 30,291,547 |
$ 3,354,486 |
$ 33,646,033 |
|
|
|
|
Year Ended December 31, 2021: |
|
|
|
Automotive |
$ 17,573,104 |
$ 157,652 |
$ 17,730,756 |
Non-automotive |
12,258,284 |
3,985,518 |
16,243,802 |
Total net sales |
$ 29,831,388 |
$ 4,143,170 |
$ 33,974,558 |
The following table presents revenue by segment, further disaggregated by location:
|
Fastener |
Assembly Equipment |
Consolidated |
Year Ended December 31, 2022: |
|
|
|
United States |
$ 24,955,181 |
$ 3,202,729 |
$ 28,157,910 |
Foreign |
5,336,366 |
151,757 |
5,488,123 |
Total net sales |
$ 30,291,547 |
$ 3,354,486 |
$ 33,646,033 |
|
|
|
|
Year Ended December 31, 2021: |
|
|
|
United States |
$ 24,280,114 |
$ 4,053,102 |
$ 28,333,216 |
Foreign |
5,551,274 |
90,068 |
5,641,342 |
Total net sales |
$ 29,831,388 |
$ 4,143,170 |
$ 33,974,558 |
Sales to one customer in the fastener segment accounted for 15% of consolidated revenues during 2022 and 13% in 2021. The accounts receivable balance for this customer accounted for 19% and 16% of consolidated accounts receivable as of December 31, 2022 and 2021, respectively. Sales to a second customer in the fastener segment accounted for 14% of consolidated revenues during 2022 and 11% in 2021. The accounts receivable balance for this customer accounted for 16% and 11% of consolidated accounts receivable as of December 31, 2022 and 2021, respectively. Sales to a third customer were 12% of consolidated revenue in 2021. The accounts receivable balance for this customer accounted for 18% of consolidated accounts receivable as of December 31, 2021.
7 - Gain on Sale of Property - On August 12, 2022, the Company entered into a Purchase and Sale Agreement (the “PSA”) with Frontenac Properties LLC (the “Purchaser”) pursuant to which the Company agreed, subject to the terms and conditions of the PSA, to sell its facility in Naperville, Illinois, in which the Company’s headquarters and warehouse space are located, to the Purchaser. On September 27, 2022, the Company’s sale of the facility to the Purchaser was completed for a selling price of $5,350,000 in cash, less customary closing costs. The net gain on the transaction was $4,738,394. A portion of the net proceeds was invested in U.S. Treasury bills and is included in cash and cash equivalents as of December 31, 2022.
Concurrently with the completion of the sale of the Naperville facility, the Company and the Purchaser entered into a lease agreement pursuant to which the Company leased 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 was $12,500 for the period from the closing until December 31, 2022 and will be $8,500 for the period from January 1, 2023 to June 30, 2023. The Company adopted the practical expedient for short-term leases under ASC 842 which allows for leases of 12 months or less to be expensed on a straight-line basis over the lease term without reporting on the balance sheet.
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8 - Commitments and Contingencies- The Company recorded rent expense aggregating approximately $91,000 and $27,000 in 2022 and 2021, respectively. Total future minimum rentals at December 31, 2022 were $51,000.
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.
9 - COVID-19- In March 2020, the World Health Organization characterized the novel coronavirus (“COVID-19”) a pandemic and the President of the United States declared the COVID-19 outbreak a national emergency. The rapid spread of the virus and the response domestically and internationally to combat it had a significant negative impact on the global economy, including the automotive industry upon which we rely for sales. Beginning in March 2020, most states issued executive orders which temporarily closed businesses deemed non-essential in an effort to prevent the spread of the coronavirus. Similar measures also took place in foreign markets we serve. As a result, our operations and the operations of our customers and suppliers were adversely affected. While most shutdown orders were lifted later that year, various work-related restrictions remained in place for some time resulting in widespread economic disruption. As of the beginning of 2022, our operations had not returned to pre-pandemic levels and the pandemic continues to disrupt and have unpredictable impacts on our operations and the markets we serve, most notably in terms of labor shortages, supply chain disruptions and high inflation. These factors make the timing and sustainability of any broad economic recovery uncertain and will likely remain tied to the course of the pandemic. As we cannot predict the duration or scope of the COVID-19 pandemic, or its broader impact on the global economy, including the demand for automobiles, it is unknown what the impact of COVID-19 and its related effects will be on our business, results of operations or financial condition, but the impact could be material and last for an extended period of time.
10 - Subsequent Events- On February 20, 2023, the Board of Directors declared a regular quarterly dividend of $0.22 per share, or $212,549, payable March 20, 2023 to shareholders of record on March 3, 2023.
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