RESULTS OF OPERATIONS

Financial results for 2017 were positive, although not as strong as those reported in 2016. Net sales were $35,764,714 in 2017 compared to $37,022,378 in 2016, a decline of $1,257,664, or 3.4%. Net income for 2017 was $2,079,082, or $2.15 per share, compared to $2,356,980, or $2.44 per share, in 2016.

2017 Compared to 2016

Fastener segment revenues were $7,658,239 in the fourth quarter of 2017, a decline of $73,195, or 0.9%, from $7,731,434 reported in the fourth quarter of 2016. Fastener segment revenues for the full year were $31,977,964 in 2017 compared with $33,126,599 in 2016, a decline of $1,148,635, or 3.5%. Our fastener segment relies on the automotive sector for the majority of its revenues. Domestic automobile and light truck sales declined approximately 2% during 2017, which negatively impacted our sales. During 2017, fastener segment margins were pressured due to greater quality related expenses and a reversal of the favorable raw material prices experienced in 2016. These factors contributed to a net reduction in gross margin for the fastener segment of $103,117 in the fourth quarter and $1,128,434 for the full year of 2017 compared to 2016.

Assembly equipment segment revenues were $800,884 in the fourth quarter of 2017, a decline of $218,661, or 21.4%, compared to the strong results in the fourth quarter of 2016, when revenues were $1,019,545. For the full year 2017, assembly equipment segment revenues were $3,786,750, a decline of $109,029, or 2.8%, compared to $3,895,779 reported in 2016. The decrease in fourth quarter and full year sales was primarily due to a reduction in the number of rivet setting machines shipped compared to the prior year periods. These declines were partially offset by an increase in machine parts and tool sales during 2017. The net decline in assembly equipment segment sales was the primary cause of the $83,200 reduction in segment margins in the fourth quarter of 2017, however through effective cost controls, margins for the year were relatively unchanged.

Selling and administrative expenses were $5,548,541 in 2017 compared to $5,559,436 in 2016, a decline of $10,895, or 0.2%. Profit sharing expense declined $118,000 for the year due to lower operating profit and payroll expense declined $83,000 due to reduced headcount. Largely offsetting these reductions was approximately $167,000 in expenses related to the implementation of a new ERP system at one of our

locations. As a percentage of net sales, selling and administrative expenses were 15.5% compared to 15% in 2016.

Other income was $100,901 in 2017 compared to $65,255 in 2016. Other income is primarily comprised of interest income which increased during the year due to rising interest rates and greater amounts invested in certificates of deposit compared to the prior year.

The Company’s effective income tax rates were 15.7% and 33.6% in 2017 and 2016, respectively. The rate was lower than the U.S. federal statutory rate in 2017 primarily due to the enactment of the Tax Cuts and Jobs Act (“the Act”) in December 2017. Among other changes, the Act reduced the maximum corporate tax rate from 35% to 21% beginning in 2018. Although the lower tax rate takes effect in 2018, deferred tax assets and liabilities should be measured using the enacted tax rate expected to apply in the years in which they are expected to be settled. The Company recorded a one-time net income tax benefit of $432,000 in the fourth quarter of 2017 as a result of the revaluation of the Company’s deferred tax assets and liabilities to reflect the lower future U.S. corporate tax rates. The 2016 rate was lower than the U.S. federal statutory rate primarily due to the Domestic Production Activities Deduction allowed under Internal Revenue Code Section 199.

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 totaling $.80 per share during 2017. In addition, an extra dividend of $.35 per share was paid during the first quarter, bringing the total distribution for the year to $1.15 per share. On February 19, 2018, the Board of Directors declared a regular quarterly dividend of $.21 per share, an increase of 5% from the prior quarter, payable March 20, 2018 to shareholders of record on March 5, 2018. This continues the uninterrupted record of consecutive quarterly dividends paid by the Company to its shareholders that extends over 84 years. At that same meeting, the Board also declared an extra dividend of $.30 per share payable March 20, 2018 to shareholders of record on March 5, 2018.

PROPERTY, PLANT AND EQUIPMENT

Capital expenditures during 2017 totaled $1,337,941. The fastener segment accounted for $1,093,539 of the

total, including $904,312 for production equipment. Cold heading and screw machine equipment additions were $303,992, quality control equipment additions were $281,983, additions for equipment to perform secondary operations on parts were $261,143 and $57,194 was expended for general plant equipment. The remainder of the fastener segment additions relate to building improvements and technology equipment. Assembly equipment segment additions totaled $178,761, primarily for production equipment. Additional investments of $65,641 were made in 2017 for building improvements that benefit both operating segments.

Total capital expenditures in 2016 were $2,027,860. Fastener segment additions accounted for $1,683,953 of the total, including $758,467 for the substantial completion of the H & L Tool building expansion that was begun in 2015. Cold heading and screw machine equipment additions totaled $180,818 while secondary processing equipment totaled $301,932. Inspection equipment comprised $247,330 of the fastener segment additions and the remaining additions of $195,406 were for various general plant equipment. Assembly equipment segment additions in 2016 were $189,568, for production equipment. Investments for the benefit of both operating segments, primarily for building improvements, totaled $154,339 during 2016.

Depreciation expense amounted to $1,231,546 in 2017 and $1,242,357 in 2016.

LIQUIDITY AND CAPITAL RESOURCES

Working capital at December 31, 2017 was approximately $17 million, an increase of $.6 million from the beginning of the year. The most significant factor in the change was the net increase in cash and certificates of deposit as a result of continued profitable operations in 2017 and the reduction in capital expenditures compared to the prior year. The Company’s holdings in cash, cash equivalents and certificates of deposit amounted to $9 million at the end of 2017, an increase of $.6 million. The Company’s investing activities in 2017 consisted primarily of capital expenditures of $1.3 million. The only financing activity during 2017 was the payment of approximately $1.1 million in dividends.

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.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

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

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 2018

We started 2018 with a more cautious outlook than a year ago. U.S. auto and light truck sales, not unexpectedly, declined from their recent peaks during 2017 and are forecast to decline further in 2018. With the majority of our fastener segment revenues coming from the automotive sector, revenue growth may be more difficult as a result. During 2017, we did add a number of non-automotive customers in the fastener segment which should help offset any shortfalls related to lower domestic automobile production. Additionally, we experienced increases in the cost of our primary raw materials during 2017 and have seen further increases in early 2018. Increases in costs can be difficult to recover in some of the markets we serve as certain customers expect prices of their parts to be held constant over the multi-year life of that part. Both of these factors will contribute to a more challenging environment for our fastener segment operations. The assembly equipment segment reported results in 2017 that were comparable to those of the prior year, however we entered 2018 with less of a machine order backlog than a year ago which will make achieving similar results for that segment more difficult.

The recently enacted tax reform and the expected increase in interest rates are two more variables that will impact results in 2018. In anticipation of the challenges ahead, we will continue our efforts to improve operational efficiency as a means of improving margins. 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, product quality and customer service in a very competitive global marketplace.

Over the last five years, we have invested $10.7 million in equipment and facilities upgrades in order to increase our capabilities, expand production capacity and improve operating efficiency. These investments, which we feel are necessary to remain competitive, have been made possible by our consistent profitability during that period. That profitability has also allowed us to pay dividends of $4.7 million over the same period and declare an additional special dividend of $.3 million, to be paid in the first quarter of 2018.

The positive results in the past year would not have been possible without the conscientious efforts of our dedicated employees, who consistently strive to meet the challenges that characterize today’s manufacturing environment. We are grateful for their contributions towards meeting our customers’ expectations related to quality, price and service. We also take this opportunity to thank our customers for having the confidence in us to be a part of their success and our shareholders for their continued support.

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—Revenues from product sales are recognized upon shipment and an allowance is provided for estimated returns and discounts based on experience. Cash received by the Company prior to shipment is recorded as unearned revenue. The Company experiences a certain degree of sales returns that varies over time. The Company is able to make a reasonable estimation of expected sales returns based upon history. The Company records all shipping and handling fees billed to customers as revenue, 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 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.

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:

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, 2017 and 2016.

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, 2017 and 2016, 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 2017 or 2016.

The Company’s federal income tax returns for the 2014 through 2016 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 2014, 2015 and 2016 federal income tax returns will expire on September 15, 2018, 2019 and 2020, respectively.

The Company’s state income tax returns for the 2014 through 2016 tax years are subject to examination by various state authorities with the latest closing period on October 31, 2020. 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.

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 2017 and 2016.

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 August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (”ASU”) No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” This ASU includes specific guidance to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The ASU is effective for annual reporting periods beginning after December 15, 2017 and interim periods within those annual periods. The Company does not expect the adoption of this ASU to have a significant impact on the consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” The ASU will increase transparency and comparability among entities by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU will require lessees to recognize in the balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The ASU is effective for annual reporting periods beginning after December 15, 2018 and interim periods within those annual periods. The impact of adopting this ASU is not expected to be significant based on current lease agreements.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance in this ASU supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition,” and most industry-specific guidance. In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”), which updated ASU 2014-09. ASU 2016-12 clarifies certain core recognition principles including collectability, sales tax presentation, noncash consideration, contract modifications and completed contracts at transition and disclosures no longer required if the full retrospective transition method is adopted. ASU 2014-09 and ASU 2016-12 are effective for annual reporting periods after December 15, 2017 and interim periods within those reporting periods, and are to be applied using either the modified retrospective or full retrospective transition methods, with early adoption permitted. The Company has reviewed its revenue sources and contracts within the scope of the ASU and based on its evaluation to date, does not anticipate this standard will have a material impact on its consolidated financial statements except for the expanded disclosure requirements. The Company will adopt this standard on January 1, 2018, as required, using the full retrospective method.

2—Balance Sheet Details

3—Income Taxes—The provision for income tax expense consists of the following:

On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law. The Act includes significant changes to

the taxation of corporations, including a reduction in the top corporate tax rate from 35% to 21%, effective January 1, 2018. Due to the enactment of the new tax law, we re-measured our deferred tax assets and liabilities using the rate at which we expect them to be recovered or settled. As a result, the Company recognized a $432,000 tax benefit for the year ended December 31, 2017 that is reflected in the 2017 income tax expense.

The following is a reconciliation of the statutory federal income tax rate to the actual effective tax rate:

The Company’s effective tax rate was lower than the U.S. federal statutory rate in 2017 primarily due to the impact of the new tax law. The Company’s effective tax rate was lower than the U.S. federal statutory rate in 2016 primarily due to the Domestic Production Activities Deduction allowed under Internal Revenue Code Section 199.

The deferred tax assets (liabilities) consist of the following:

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, 2017 or 2016.

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 approximately $266,000 in 2017 and $384,000 in 2016.

5—Other Income—consists of the following:

6—Segment Information—The Company operates, primarily 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:

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. Sales to one customer in the fastener segment accounted for 19 percent of consolidated revenues during both 2017 and 2016. The accounts receivable balance for this customer accounted for 25 and 22 percent of consolidated accounts receivable as of December 31, 2017 and 2016, respectively. Sales to a second customer were 12 percent in 2016 and accounted for 12 percent of consolidated accounts receivable as of December 31, 2016.

7—Commitments and Contingencies—The Company recorded rent expense aggregating approximately $30,000 and $26,000 in 2017 and 2016, respectively. Total future minimum rentals at December 31, 2017 are not significant.

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.

8—Subsequent Events—On February 19, 2018, the Board of Directors declared a regular quarterly dividend of $.21 per share, or $202,888, and an extra dividend of $.30 per share, or $289,840, payable March 20, 2018 to shareholders of record on March 5, 2018.

BOARD OF DIRECTORS

John A. Morrissey (e)

Chairman of the Board

of the Company

Chairman of the Board of

Algonquin State Bank, N.A.

Algonquin, Illinois

Michael J. Bourg (e)

President of the Company

Edward L. Chott (a) (c) (n)

Chairman of the Board of

The Broaster Co.

Beloit, Wisconsin

Kent H. Cooney (a)

Private Investor

Woodstock, Illinois

William T. Divane, Jr. (a) (c) (n)

Chairman of the Board and

Chief Executive Officer of

Divane Bros. Electric Co.

Franklin Park, Illinois

Walter W. Morrissey (e)

Attorney at Law

Lillig & Thorsness, Ltd.

Oak Brook, Illinois

John L. Showel (n)

Portfolio Manager

Maggiore Fund I, LP

Chicago, Illinois

CORPORATE OFFICERS

John A. Morrissey

Chairman, Chief

Executive Officer

Michael J. Bourg

President, Chief Operating

Officer and Treasurer

Kimberly A. Kirhofer

Secretary

CHICAGO RIVET & MACHINE CO.

Administrative & Sales Offices

Naperville, Illinois

Pembroke, Massachusetts

Manufacturing Facilities

Albia Division

Albia, Iowa

Tyrone Division

Tyrone, Pennsylvania

H & L Tool Company, Inc.

Madison Heights, Michigan