Summary of CHICAGO RIVET & MACHINE CO

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results for the third quarter of 2008, as well as the current year to date, continued to be negatively impacted by the decline in domestic automotive production compared to the year earlier periods, as well as worsening overall economic conditions. Net revenues in the third quarter of 2008 were $6,662,021, a decline of 26.3% compared to 2007, when revenues were $9,043,603. Year to date revenues total $23,123,359, a decline of 20.6% compared to the $29,121,499 recorded for the first three quarters of 2007. Although we have reduced expenses, cost reductions were not sufficient to offset the effects of the decline in sales. The net result was a net loss of $195,409, or $0.20 per share, in the third quarter of 2008 compared to net income of $372,101, or $0.39 per share, in 2007. The year to date net loss is $187,158, or $0.19 per share, compared to net income of $1,205,772, or $1.25 per share, for 2007.
Within the fastener segment, third quarter revenues declined by $2,175,478, or 27.5%, from $7,905,111 in 2007, to $5,729,633 in 2008. On a year to date basis, 2008 fastener segment revenues have declined by $5,395,947, or 21.2%, from $25,491,263 in 2007 to $20,095,316 in 2008. Demand among automotive sector customers, which has been down since late last year due to slumping U.S. auto sales, weakened further during the quarter as U.S. auto sales near a two-decade low. The spreading economic crisis further negatively impacted most other markets we serve. Along with the drop in demand, we have seen a dramatic increase in the cost of certain items we purchase, most notably steel and natural gas. While the price of steel has risen dramatically this year, our overall raw material costs are down due to the reduction in production activity. The increase in material prices results in raw materials accounting for a larger percentage of cost of sales compared to last year. In addition to natural gas, which increased by $14,000 during the third quarter and $49,000 year to date, the only significant increase in overhead during 2008 was tooling expense, which increased $65,000 through three quarters of 2008, down from $105,000 for the first half of the year, as certain design work was performed in an attempt to improve production efficiency. The closing of the Jefferson, Iowa plant in 2007 has resulted in approximately $106,000 in overhead cost reductions during 2008 compared to 2007. The net result of these factors was a $927,000 reduction in fastener segment gross margin during the third quarter and a $2,237,000 reduction in the year to date amount.
Assembly equipment segment revenues totaled $932,388 in the third quarter of 2008, a decline of $206,104, or 18.1%, compared to the third quarter of 2007, when revenues were $1,138,492. Demand for our products in this segment continues to be weak and the lower level of production activity, brought on by reduced demand, resulted in a $41,000 decline in gross margin compared to the third quarter of 2007. For the first nine months of 2008, revenues in this segment amounted to $3,028,043, a $602,193 decline, or 16.6%, compared to the first nine months of 2007 when net revenues totaled $3,630,236. In response to the lower level of sales activity in 2008, we have implemented steps to reduce and control expenses, including reductions in both staffing levels and work schedules. The cumulative effect of these actions, however, has not been sufficient to fully offset the effects of reduced volume and, as a result, gross margins declined to $917,000 from $1,186,000 last year.
Selling and administrative expenses for the third quarter of 2008 were $122,766 lower than during the third quarter of 2007. The lower sales in the quarter resulted in a $43,000 reduction in commission expense. Profit sharing expense declined $29,000 in the third quarter compared with last year due to the reduction in earnings, while office supplies and sales promotion expenses were reduced $15,000 and $11,000, respectively. Lastly, salaries and related benefits account for approximately $10,000 of the net decline due to reduced headcount. The remaining net decrease in the quarter relates to various items with smaller changes. On a year to date basis, selling and administrative expenses have declined $377,558 in 2008 compared with the first nine months of 2007. The largest components of the year to date decline are sales commissions, profit sharing and salaries and related benefits, which have declined by $134,000, $115,000 and $104,000, respectively for the reasons stated above.
Working capital at September 30, 2008 was approximately $16 million, a reduction of $.5 million from the beginning of the year. While accounts receivable have declined $.8 million since the beginning of the year, primarily due to the lower sales in the third quarter of 2008 compared to the fourth quarter of last year, inventories have increased $.6 million, due to higher raw material prices compared to last year as well as larger quantities of raw material on hand due to reduced customer demand. The net result of these changes and other cash flow items on cash, cash equivalents and certificates of deposit was a decrease of $.2 million, to $7.4 million, as of September 30, 2008.
The Company has a $1.0 million line of credit, which expires May 31, 2009. This line of credit remains unused. Management believes that current cash, cash equivalents, operating cash flow and the available line of credit will provide adequate working capital for the foreseeable future.

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The decline in revenues in the third quarter and year to date reflects the continued drop in production activity in our primary markets. The fastener segment, which is primarily dependent on sales to companies in the automotive industry, has experienced five straight quarters of declining sales. What began late last year as weakness in the automotive market has now spread to other markets due to the weak economy. The assembly equipment segment, while not as reliant on the automotive sector for revenues, has been hurt by the overall decline in domestic manufacturing activity. Predicting future demand in our markets is difficult and that uncertainty will keep us cautious in the near-term. In response to these challenging market conditions, we will continue to make adjustments to our activities where possible without sacrificing the unsurpassed quality and excellent customer service that is the basis for our success.
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: 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, 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, the loss of the services of our key employees and difficulties in achieving expected 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.