EXHIBIT 99.1
To Our Shareholders:
The comparative results of operations of Chicago Rivet & Machine Co. for
the third quarter and first nine months of 2005 and 2004 are summarized below.
Revenues for the third quarter of 2005 were 4.2% higher than during the
third quarter of 2004. Unfortunately, the increase in revenues was more than
offset by higher manufacturing costs and increases in administrative expenses,
which are discussed more fully in the following paragraphs. On a year to date
basis, current year revenues are less than .5% higher than for the first nine
months of 2004. Year to date, gross margins are lower than last year and
administrative expenses are higher. As a result, the company recorded a net loss
of $169,780, or $.17 per share in the third quarter of 2005 and a net loss of
$399,032, or $.41 per share for the first nine months of 2005, compared to net
income of $601,615, or $.62 per share in the third quarter of 2004 and net
income of $1,278,879, or $1.32 per share for the first nine months of 2004.
Third quarter revenues within the fastener segment increased $664,000
compared with the third quarter of 2004. However, competitive pressures in the
market place, combined with higher material costs and a shift in product mix
contributed to a decline in gross margins, despite these higher revenues.
Material costs were $662,000 higher than in the year earlier quarter. Labor and
fringe benefit costs increased approximately $172,000 compared to the third
quarter of 2004. Of this total, approximately $66,000 represents increases in
wages, $41,000 is due to higher overtime expense incurred, with the balance due
to higher labor costs per unit of product manufactured. Tooling costs increased
$141,000 compared to the third quarter of 2004, due to initial costs associated
with the launch of several new parts. In addition to overtime cited above, we
incurred $42,000 in expediting expenses to meet shortened customer lead-times,
mainly associated with the launch of new parts. The balance of the change is
primarily a reflection of lower margins due to the change in product mix. Year
to date, 2005 fastener revenues totaled $25,281,006, a 3.3% increase over the
first nine months of 2004. While revenues increased $804,000, cost of goods sold
increased $2,423,000 resulting in a decline of $1,619,000 in gross margins for
the first nine months of 2005 compared to the first nine months of 2004. Higher
material costs account for $1,533,000 of this change. Increased volumes account
for approximately $243,000 of this increase. Other factors that impact material
costs include higher material prices of $708,000, and increases in outside
processing costs, which are primarily due to changes in product mix, of
$576,000. The balance of the increase is related to a change in product mix.
Labor and benefit expenses are $184,000 higher in 2005, reflecting higher wage
rates, while tooling costs are approximately $184,000 higher than during the
prior period due to costs incurred in connection with new parts. Costs
associated with expediting to meet shortened customer lead-time requirements
have increased $96,000 year to date. The balance of the increase in cost of
goods sold is related to incremental changes in the cost of a variety of
overhead components.
Revenues within the assembly equipment segment declined by $271,000, or
18%, during the third quarter of 2005 compared to the third quarter of 2004. On
a year to date basis, 2005 revenues are approximately 13% lower than in the
first nine months of 2004. Gross margins in this segment were adversely affected
by the decline in volume. Despite efforts to reduce manufacturing expenses and
employment levels, we were unable to reduce costs at a rate proportionate with
the decline in revenues. As a result, third quarter gross margins declined
$177,000 compared to the third quarter of 2004. A comparison of results for the
first nine months of 2005 and 2004 yields similar results, for similar reasons.
Specifically, revenues have declined $670,000 and gross margins have declined
$308,000. As was the case in the third quarter, reductions in cost have not kept
pace with the decline in volumes, and the result is lower margins for this
segment.
Selling and administrative expenses for the third quarter of 2005 were
$493,000 higher than those recorded in the third quarter of 2004. The largest
factor affecting the year to year comparison is that during the third quarter of
2004, the Company received a refund of Michigan single business tax amounting to
approximately $330,000 as the result of a successful appeal of the tax
calculation for four prior years. Professional expenses incurred, primarily
related to compliance with the Sarbanes-Oxley Act of 2002, were $92,000 higher
in the current quarter than during the third quarter of 2004. The Company
recorded an expense of $70,000 during the third quarter to resolve an ongoing
litigation matter and incurred legal fees related to this matter of
approximately $33,000 during the third quarter of 2005. In addition, the Company
recorded a reserve of $50,000, in connection with the bankruptcy of a certain
customer. These increases were partially offset by a reduction in profit sharing
expense of $118,000. On a year to date basis, selling and administrative
expenses are $670,000 higher than in the previous year. $330,000 of the year to
year increase is related to the tax refund discussed above. Costs related to
resolving litigation, including legal fees, amounted to approximately $298,000
during 2005. Professional fees incurred in connection with Sarbanes-Oxley
compliance account for approximately $272,000 of the year over year increase in
administrative expenses. These increases were partially offset by a reduction in
profit
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sharing expense of $259,000. The balance of the increase is due to smaller net
changes in a variety of expense categories.
Clearly, results of operations are unsatisfactory. However, given current
conditions, we do not foresee significant improvements in the short term. The
market for our products remains weak. Competition from foreign sources continues
to be a significant factor, as products previously produced in this country are
now imported as completed assemblies. This limits demand for both fasteners and
assembly equipment. Domestic automobile manufacturers' share of the automotive
market continues to decline. To date, our efforts to develop supply
relationships with foreign manufacturers have not been as successful as we
anticipated. Increasing costs of materials, supplies and fuel are eroding
margins further and market conditions severely limit our ability to recover
these higher costs from existing customers. We continue to actively pursue new
business from both new and existing customers. We have had some success in this
area and plan to continue these efforts. On a more positive note, we anticipate
that legal expenses will return to more normal levels in the coming months, and
costs related to Sarbanes-Oxley compliance should also decline toward the end of
the year. Increasing revenues remains the critical component in our efforts to
restore profitability. Increasing sales revenues, along with further cost
reductions and reduced administrative expense, are essential to achieving a
return to profitability. We have learned that progress toward these objectives
will not come easily or quickly, but we recognize that changes must be effected
to restore profitability.
Respectfully yours,
John A. Morrissey John C. Osterman
Chairman President
November 14, 2005
The foregoing discussion is only intended to provide highlights of operations
for the periods covered. Additional information is contained in our Form 10-Q,
which has been filed with the SEC and is available to shareholders upon request
from the Company, or via the internet through the SEC's EDGAR database. 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, among other things, our ability to maintain our relationships
with our significant customers; increased global competition; increases in the
prices of, or limitations on the availability of, our primary raw materials; our
ability to generate cost savings and manufacturing efficiencies; the financial
condition of our customers; and conditions in the automotive industry, upon
which we rely for sales revenue, and which is cyclical and dependent on, among
other things, consumer spending. 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.
CHICAGO RIVET & MACHINE CO.
Summary of Consolidated Results of Operations
For the Three and Nine Months Ended September 30
THIRD QUARTER FIRST NINE MONTHS
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2005 2004 2005 2004
---------- ---------- ----------- -----------
Net sales and lease revenue $9,718,361 $9,324,695 $29,865,615 $29,731,215
Income (loss) before income taxes (254,780) 916,615 (600,032) 1,947,879
Net income (loss) (169,780) 601,615 (399,032) 1,278,879
Net income (loss) per share (.17) .62 (.41) 1.32
Average shares outstanding 966,132 966,132 966,132 966,132
(All figures subject to year-end audit)
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