Financial Condition and Results of Operations





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 above under "Risk Factors" and elsewhere in this Form 10-K. As stated elsewhere in this filing, such 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 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.





RESULTS OF OPERATIONS

Operating results for 2022 did not meet our expectations. Net sales grew in the first half of the year, but stalled in the third quarter and declined in the fourth quarter as overall demand softened amid recessionary fears and rising interest rates. At the same time, we had difficulties meeting the requirements of certain customers due to staffing shortages. In addition, higher raw material prices and inflationary pressures also negatively impacted our margins.

Fourth quarter sales were $6,857,154 compared to $7,749,488 in the fourth quarter of 2021, a decline of $892,334, or 11.5%. The decline in sales, combined with high raw material prices, record-high inflation and the tight labor market contributed to reporting a net loss in the fourth quarter of $1,312,648, or $1.36 per share, compared to net income of $81,178, or $0.08 per share, in the fourth quarter of 2021. For the full year, net sales were $33,646,033 compared to $33,974,558 in 2021, a decline of $328,525, or 1.0%.

Net income for the full year was $2,867,629, or $2.97 per share, compared to $1,113,472, or $1.15 per share in 2021. The positive figure for 2022 includes a pre-tax gain on the sale of our Naperville, Illinois property of $4,738,394 that was reported in the third quarter.


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2022 Compared to 2021

Fastener segment revenues were $6,272,480 in the fourth quarter of 2022 compared to $6,988,047 in the fourth quarter of 2021, a decline of $715,567, or 10.2%.

We experienced a general slow-down in demand in the fourth quarter compared to earlier in the year, but at the same time, were unable to meet the requirements of certain automotive customers, where demand remained steady, due to insufficient production staff. During the quarter, sales to automotive customers increased fractionally to $4,185,600 from $4,163,004 in the year earlier quarter. That increase was more than offset by a decline in sales to non-automotive customers, which were $2,086,880 in the fourth quarter of 2022 compared to $2,825,043 a year earlier, a decline of $738,163, or 26.1%. The abrupt decline in sales and production challenges due to staffing shortages resulted in reporting a gross loss in the fourth quarter of $555,641 compared to gross profit of $1,072,310 in the year earlier quarter. Fastener segment revenues for the full year 2022 were $30,291,547 compared to $29,831,388 in 2021, an increase of $460,159, or 1.5%. For the full year 2022, sales to automotive customers were $18,454,238 compared to $17,573,104 in 2021, an increase of $881,134, or 5.0%. Sales to non-automotive customers in 2022 were $11,837,309 compared to $12,258,284 in 2021, a decline of $420,975, or 3.4%.

The modest increase in fastener segment sales was more than offset by higher costs as raw material prices remained elevated and general inflation reached record levels. Difficulty achieving proper staffing further negatively impacted margins as operational efficiency suffered. As a result, gross margin for the fastener segment was $3,167,104 in 2022 compared to $5,185,956 in 2021.

Assembly equipment segment revenues were $584,674 in the fourth quarter of 2022, compared to $761,441 in the fourth quarter of 2021, a decline of $176,767, or 23.2%. For the full year 2022, assembly equipment segment revenues were $3,354,486, compared to $4,143,170 reported in 2021, a decline of $788,684, or 19.0%. While the decline in sales was significant, it should be noted that 2021 assembly equipment sales were the highest annual total since 2007. The decline in sales, combined with high inflation and some delivery delays for machine parts, resulted in a gross loss of $51,543 for the fourth quarter of 2022 compared to a gross profit of $195,237 in the fourth quarter of 2021. For the full year 2022, assembly equipment segment gross margins declined to $648,220 from $1,279,136 in 2021.

Selling and administrative expenses were $4,992,521 in 2022 compared to $5,106,177 in 2021, a decrease of $113,656, or 2.2%. We incurred an increase in outside consulting of $42,498, primarily related to hiring fees to fill certain positions, and rent expense of approximately $33,387, primarily related to the lease agreement entered into upon the sale of the Naperville facility. These, and other smaller increases, were offset by a reduction in salaries of $135,714, related to positions that remained unfilled for an extended period of time during the year, and reductions in commissions and director fees of $44,126 and $43,739, respectively. The remaining net change relates to various smaller items. As a percentage of net sales, selling and administrative expenses were 14.8% in 2022 compared to 15.0% in 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 leased the warehouse portion of the Naperville facility from the purchaser until December 31, 2022 and will lease 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 is $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 to reduce the occupancy space devoted to administrative functions.

Other income was $91,433 in 2022 compared to $55,557 in 2021. Other income is primarily comprised of interest income which increased during the year due to higher interest rates and greater invested balances.

The Company's effective income tax rates were 21.5% and 21.3% in 2022 and 2021, respectively.





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. The Company paid four regular quarterly dividends in 2022 totaling $0.88 per share. On February 20, 2023, the Board of Directors declared a regular quarterly dividend of $0.22 per share, payable March 20, 2023 to shareholders of record on March 3, 2023. This continues the uninterrupted record of consecutive quarterly dividends paid by the Company to its shareholders that extends over 89 years.

PROPERTY, PLANT AND EQUIPMENT

Total capital expenditures in 2022 were $969,943. Fastener segment additions accounted for $868,654 of the total, including $92,880 for cold heading and screw machine equipment, $208,028 for equipment to perform secondary operations and inspection of parts and $215,540 for general plant equipment. The remaining $352,206 of fastener segment additions related to building improvements.

Assembly equipment segment additions in 2022 were $3,207 for IT equipment.

Investments for the benefit of both operating segments, primarily for building improvements, totaled $98,082 during 2022.

Capital expenditures during 2021 were $670,898. Of the total, $493,564 related to fastener segment activities, including cold heading equipment additions of $62,600, secondary processing equipment of $360,588 and general plant equipment additions of $70,376. Additional investments of $177,334 were made in 2021 for facilities improvements that benefit both the assembly equipment segment and the fastener segment.

Depreciation expense was $1,279,870 in 2022 and $1,318,554 in 2021.

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LIQUIDITY AND CAPITAL RESOURCES

Working capital at December 31, 2022 was $20,073,089, an increase of $2,651,504 from 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. While working capital also improved due to a decline in net accounts receivable during the year of $672,847, an increase in inventory of $601,450, due to higher material prices and elevated quantities on hand to minimize supply disruptions, and a $585,190 increase in other current assets, had a negative impact on working capital. The Company's investing activities in 2022 included the proceeds from the sale of property and equipment of $5,043,240 and the net maturities of certificates of deposit of $50,000 less capital expenditures of $969,943. The only financing activity during 2022 was the payment of $850,196 in dividends. These changes and other cash flow activity resulted in a balance of cash, cash equivalents and certificates of deposit of $6,736,101 at the end of 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 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, any off-balance sheet financing arrangements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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. We base our estimates and assumptions on historical experience, current trends and on various other assumptions that are believed to be reasonable under the circumstances. We evaluate our estimates and judgments required by our policies on an ongoing basis and update them as appropriate based on changing conditions.

A summary of critical accounting policies can be found in Note 1 of the financial statements.

Critical accounting estimates are those that require application of management's most difficult, subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. We have reviewed our accounting estimates, and none were deemed to be considered critical for the accounting periods presented. While we apply our judgment based on assumptions believed to be reasonable under the circumstances, actual results could vary from these assumptions. Additionally, future facts and circumstances could change and impact our estimates and assumptions.


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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 2023

Operating results for 2022 were negatively impacted by numerous factors.

Although demand early in the year was steady for both the fastener segment and the assembly equipment segment, as the year progressed, we experienced a softening in demand which led to a significant drop in sales in the fourth quarter. The tight labor market made maintaining an optimal workforce difficult and those challenges intensified as the year progressed. We endured extended periods where important positions remained unfilled, resulting in inefficiencies and higher costs. We are committed to overcoming these challenges as part of an overall strategic review that is underway and have made investments in the new year in an effort to address the challenges of maintaining efficient operations with a smaller, less experienced workforce. We are also reviewing, and seeking to adjust, our pricing in light of higher operating costs related to the current economic and labor market environment. As always, we will continue to look for additional areas for improvement while pursuing opportunities to increase sales by emphasizing value over price and focusing on our abilities to make more complex parts for which our experience, quality and service are important factors in purchasing decisions.

We were saddened to report the passing of Walter W. Morrissey in December 2022.

Mr. Morrissey had served as a Director of the Company since 1972 and as Chairman of the Board and Chief Executive Officer since May 2020. His contributions to the success of the Company over the years will be missed.

Director James W. Morrissey was named non-executive Chairman of the Board until the Annual Meeting of Shareholders on May 9, 2023. The search for a new Chief Executive Officer is currently underway.

Notwithstanding the difficult environment we are operating in, we believe that our sound financial condition and long history of success in a variety of challenging circumstances will provide the basis for improved operating activities in the future. We increased our capital expenditures in 2022 over the previous year and expect to make further investments in 2023. We will also 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. We are grateful for the contributions of our dedicated employees in what was a uniquely challenging year as well as for the loyalty of our customers and the support of our shareholders.

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