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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended September 30, 2020

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from _________ to _________

Commission file number 1-13905

 

COMPX INTERNATIONAL INC.

(Exact name of Registrant as specified in its charter)

 

Delaware

 

57-0981653

(State or other jurisdiction of

Incorporation or organization)

 

(IRS Employer

Identification No.)

 

5430 LBJ Freeway, Suite 1700,

Three Lincoln Centre, Dallas, Texas

 

75240-2620

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code (972) 448-1400

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Class A common stock

 

CIX

 

NYSE American

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  

Large accelerated filer      Accelerated filer      Non-accelerated filer     Smaller reporting company  

Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  .

As of October 28, 2020, the registrant had 12,451,157 shares of Class A common stock, $.01 par value per share, outstanding.

 

 

 

 


COMPX INTERNATIONAL INC.

Index

 

Part I.

  

FINANCIAL INFORMATION

Page

Item 1.

  

Financial Statements

 

 

 

  

 

Condensed Consolidated Balance Sheets – December 31, 2019 and September 30, 2020 (unaudited)

  - 3 -

 

 

  

 

Condensed Consolidated Statements of Income (unaudited) – Three and nine months ended September 30, 2019 and 2020

  - 4 -

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity (unaudited) – Three and nine months ended September 30, 2019 and 2020

  - 5 -

 

 

  

 

Condensed Consolidated Statements of Cash Flows (unaudited) - Nine months ended September 30, 2019 and 2020

  - 6 -

 

 

  

 

Notes to Condensed Consolidated Financial Statements (unaudited)

  - 7 -

 

Item 2.

  

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   - 11 -

 

Item 3.

  

 

Quantitative and Qualitative Disclosure About Market Risk

   - 16 -

 

Item 4.

  

 

Controls and Procedures

   - 16 -

 

Part II.

  

 

OTHER INFORMATION

 

 

Item 1A.

  

 

Risk Factors

   - 18 -

 

Item 6.

  

 

Exhibits

   - 18 -

 

Items 2, 3, 4 and 5 of Part II are omitted because there is no information to report.

 

 

 

 

 

 

 

- 2 -


 

COMPX INTERNATIONAL INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 

 

December 31,

 

 

September 30,

 

 

2019

 

 

2020

 

ASSETS

 

 

 

 

(unaudited)

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

63,255

 

 

$

65,075

 

Accounts receivable, net

 

11,870

 

 

 

12,277

 

Inventories, net

 

18,348

 

 

 

19,166

 

Prepaid expenses and other

 

1,624

 

 

 

1,254

 

Total current assets

 

95,097

 

 

 

97,772

 

Other assets:

 

 

 

 

 

 

 

Note receivable from affiliate

 

28,100

 

 

 

30,500

 

Goodwill

 

23,742

 

 

 

23,742

 

Other noncurrent

 

590

 

 

 

590

 

Total other assets

 

52,432

 

 

 

54,832

 

Property and equipment:

 

 

 

 

 

 

 

Land

 

4,940

 

 

 

4,940

 

Buildings

 

23,047

 

 

 

23,057

 

Equipment

 

67,718

 

 

 

68,047

 

Construction in progress

 

1,002

 

 

 

763

 

 

 

96,707

 

 

 

96,807

 

Less accumulated depreciation

 

65,692

 

 

 

67,445

 

Net property and equipment

 

31,015

 

 

 

29,362

 

Total assets

$

178,544

 

 

$

181,966

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

$

12,078

 

 

$

11,075

 

Income taxes payable to affiliates

 

984

 

 

 

658

 

Total current liabilities

 

13,062

 

 

 

11,733

 

Noncurrent liabilities -

 

 

 

 

 

 

 

Deferred income taxes

 

3,287

 

 

 

3,486

 

Stockholders' equity:

 

 

 

 

 

 

 

Preferred stock

 

 

 

 

 

Class A common stock

 

124

 

 

 

124

 

Additional paid-in capital

 

55,869

 

 

 

55,987

 

Retained earnings

 

106,202

 

 

 

110,636

 

Total stockholders' equity

 

162,195

 

 

 

166,747

 

Total liabilities and stockholders’ equity

$

178,544

 

 

$

181,966

 

 

Commitments and contingencies (Note 1)

See accompanying Notes to Condensed Consolidated Financial Statements.

 

- 3 -


COMPX INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

 

 

Three months ended

 

 

Nine months ended

 

 

September 30,

 

 

September 30,

 

 

2019

 

 

2020

 

 

2019

 

 

2020

 

 

(unaudited)

 

 

(unaudited)

 

Net sales

$

29,703

 

 

$

28,426

 

 

$

94,610

 

 

$

84,537

 

Cost of sales

 

20,227

 

 

 

21,098

 

 

 

64,571

 

 

 

59,412

 

Gross margin

 

9,476

 

 

 

7,328

 

 

 

30,039

 

 

 

25,125

 

Selling, general and administrative expense

 

5,210

 

 

 

5,246

 

 

 

15,860

 

 

 

15,654

 

Operating income

 

4,266

 

 

 

2,082

 

 

 

14,179

 

 

 

9,471

 

Interest income

 

848

 

 

 

360

 

 

 

2,512

 

 

 

1,337

 

Income before taxes

 

5,114

 

 

 

2,442

 

 

 

16,691

 

 

 

10,808

 

Provision for income taxes

 

1,227

 

 

 

610

 

 

 

3,923

 

 

 

2,640

 

Net income

$

3,887

 

 

$

1,832

 

 

$

12,768

 

 

$

8,168

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net income per common share

$

0.31

 

 

$

0.15

 

 

$

1.03

 

 

$

0.66

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average shares outstanding

 

12,433

 

 

 

12,451

 

 

 

12,439

 

 

 

12,447

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

- 4 -


COMPX INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(unaudited)

 

 

 

 

Three months ended September 30, 2019 and 2020 (unaudited)

 

 

Class A

 

 

Additional

 

 

 

 

 

 

Total

 

 

common

 

 

paid-in

 

 

Retained

 

 

stockholders'

 

 

stock

 

 

capital

 

 

earnings

 

 

equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2019

$

124

 

 

$

55,869

 

 

$

100,826

 

 

$

156,819

 

Net income

 

 

 

 

 

 

 

3,887

 

 

 

3,887

 

Cash dividends ($0.07 per share)

 

 

 

 

 

 

 

(871

)

 

 

(871

)

Balance at September 30, 2019

$

124

 

 

$

55,869

 

 

$

103,842

 

 

$

159,835

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2020

$

124

 

 

$

55,987

 

 

$

110,049

 

 

$

166,160

 

Net income

 

 

 

 

 

 

 

1,832

 

 

 

1,832

 

Cash dividends ($0.10 per share)

 

 

 

 

 

 

 

(1,245

)

 

 

(1,245

)

Balance at September 30, 2020

$

124

 

 

$

55,987

 

 

$

110,636

 

 

$

166,747

 

 

 

Nine months ended September 30, 2019 and 2020 (unaudited)

 

 

Class A

 

 

Additional

 

 

 

 

 

 

Total

 

 

common

 

 

paid-in

 

 

Retained

 

 

stockholders'

 

 

stock

 

 

capital

 

 

earnings

 

 

equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

$

124

 

 

$

55,751

 

 

$

93,687

 

 

$

149,562

 

Net income

 

 

 

 

 

 

 

12,768

 

 

 

12,768

 

Issuance of common stock

 

 

 

 

118

 

 

 

 

 

 

118

 

Cash dividends ($0.21 per share)

 

 

 

 

 

 

 

(2,613

)

 

 

(2,613

)

Balance at September 30, 2019

$

124

 

 

$

55,869

 

 

$

103,842

 

 

$

159,835

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2019

$

124

 

 

$

55,869

 

 

$

106,202

 

 

$

162,195

 

Net income

 

 

 

 

 

 

 

8,168

 

 

 

8,168

 

Issuance of common stock

 

 

 

 

118

 

 

 

 

 

 

118

 

Cash dividends ($0.30 per share)

 

 

 

 

 

 

 

(3,734

)

 

 

(3,734

)

Balance at September 30, 2020

$

124

 

 

$

55,987

 

 

$

110,636

 

 

$

166,747

 

See accompanying Notes to Condensed Consolidated Financial Statements.

- 5 -


COMPX INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

Nine months ended

 

 

September 30,

 

 

2019

 

 

2020

 

 

(unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

$

12,768

 

 

$

8,168

 

Depreciation and amortization

 

2,738

 

 

 

2,872

 

Deferred income taxes

 

245

 

 

 

199

 

Other, net

 

428

 

 

 

256

 

Change in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable, net

 

(1,308

)

 

 

(423

)

Inventories, net

 

(1,888

)

 

 

(937

)

Accounts payable and accrued liabilities

 

(130

)

 

 

(934

)

Accounts with affiliates

 

(432

)

 

 

239

 

Prepaids and other, net

 

34

 

 

 

(195

)

Net cash provided by operating activities

 

12,455

 

 

 

9,245

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Capital expenditures

 

(2,453

)

 

 

(1,291

)

Proceeds from sale of fixed assets

 

121

 

 

 

 

Note receivable from affiliate:

 

 

 

 

 

 

 

Collections

 

25,400

 

 

 

22,828

 

Advances

 

(28,100

)

 

 

(25,228

)

Net cash used in investing activities

 

(5,032

)

 

 

(3,691

)

Cash flows from financing activities -

 

 

 

 

 

 

 

Dividends paid

 

(2,613

)

 

 

(3,734

)

Cash and cash equivalents - net change from:

 

 

 

 

 

 

 

Operating, investing and financing activities

 

4,810

 

 

 

1,820

 

Balance at beginning of period

 

45,414

 

 

 

63,255

 

Balance at end of period

$

50,224

 

 

$

65,075

 

Supplemental disclosures -

 

 

 

 

 

 

 

Cash paid for income taxes

$

4,020

 

 

$

2,767

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

- 6 -


COMPX INTERNATIONAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(unaudited)

 

Note 1 – Organization and basis of presentation:

Organization. We (NYSE American: CIX) were approximately 86% owned by NL Industries, Inc. (NYSE: NL) at September 30, 2020. We manufacture and sell component products (security products and recreational marine components). At September 30, 2020, Valhi, Inc. (NYSE: VHI) owned approximately 83% of NL’s outstanding common stock and a wholly-owned subsidiary of Contran Corporation owned approximately 92% of Valhi’s outstanding common stock. A majority of Contran's outstanding voting stock is held directly by Lisa K. Simmons and various family trusts established for the benefit of Ms. Simmons, Thomas C. Connelly (the husband of Ms. Simmons’ late sister) and their children and for which Ms. Simmons or Mr. Connelly, as applicable, serve as trustee (collectively, the “Other Trusts”). With respect to the Other Trusts for which Mr. Connelly serves as trustee, he is required to vote the shares of Contran voting stock held in such trusts in the same manner as Ms. Simmons. Such voting rights of Ms. Simmons last through April 22, 2030 and are personal to Ms. Simmons. The remainder of Contran’s outstanding voting stock is held by another trust (the “Family Trust”), which was established for the benefit of Ms. Simmons and her late sister and their children and for which a third-party financial institution serves as trustee. Consequently, at September 30, 2020 Ms. Simmons and the Family Trust may be deemed to control Contran, and therefore may be deemed to indirectly control the wholly-owned subsidiary of Contran, Valhi, NL and us.  

 

Basis of presentation. Consolidated in this Quarterly Report are the results of CompX International Inc. and its subsidiaries. The unaudited Condensed Consolidated Financial Statements contained in this Quarterly Report have been prepared on the same basis as the audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2019 that we filed with the Securities and Exchange Commission (“SEC”) on February 26, 2020 (the “2019 Annual Report”). In our opinion, we have made all necessary adjustments (which include only normal recurring adjustments) in order to state fairly, in all material respects, our consolidated financial position, results of operations and cash flows as of the dates and for the periods presented. We have condensed the Consolidated Balance Sheet at December 31, 2019 contained in this Quarterly Report as compared to our audited Consolidated Financial Statements at that date, and we have omitted certain information and footnote disclosures (including those related to the Consolidated Balance Sheet at December 31, 2019) normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Our results of operations for the interim periods ended September 30, 2020 may not be indicative of our operating results for the full year. The Condensed Consolidated Financial Statements contained in this Quarterly Report should be read in conjunction with our 2019 Consolidated Financial Statements contained in our 2019 Annual Report.  

Our operations are reported on a 52 or 53-week year. For presentation purposes, annual and quarterly information in the Condensed Consolidated Financial Statements and accompanying notes are presented as ended September 30, 2019, December 31, 2019 and September 30, 2020.  The actual dates of our annual and quarterly periods are September 30, 2019, December 29, 2019 and September 27, 2020, respectively. Unless otherwise indicated, references in this report to “we”, “us” or “our” refer to CompX International Inc. and its subsidiaries, taken as a whole.

Our results of operations for the first nine months of 2020 were significantly impacted by the COVID-19 pandemic, primarily in the second and third quarters, due to government mandated closures and reduced demand for many of our products resulting from the rapid contraction of vast areas of the economy. The extent of the COVID-19 impact on our future operations will depend on the time period and degree to which the COVID-19 pandemic persists in the economy thereby reducing customer demand for certain of our products, including the timing and extent to which our customers’ operations continue to be impacted, our customers’ perception as to when consumer demand for their products will return to pre-pandemic levels and on any future disruptions in our operations or our suppliers’ operations, all of which are difficult to predict.

- 7 -


Note 2 – Business segment information:

 

 

Three months ended

 

 

Nine months ended

 

 

September 30,

 

 

September 30,

 

 

2019

 

 

2020

 

 

2019

 

 

2020

 

 

(In thousands)

 

 

(In thousands)

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Security Products

$

23,405

 

 

$

21,209

 

 

$

75,036

 

 

$

65,251

 

Marine Components

 

6,298

 

 

 

7,217

 

 

 

19,574

 

 

 

19,286

 

Total net sales

$

29,703

 

 

$

28,426

 

 

$

94,610

 

 

$

84,537

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Security Products

$

4,866

 

 

$

2,797

 

 

$

15,990

 

 

$

11,871

 

Marine Components

 

1,042

 

 

 

1,129

 

 

 

3,223

 

 

 

3,010

 

Corporate operating expenses

 

(1,642

)

 

 

(1,844

)

 

 

(5,034

)

 

 

(5,410

)

Total operating income

 

4,266

 

 

 

2,082

 

 

 

14,179

 

 

 

9,471

 

Interest income

 

848

 

 

 

360

 

 

 

2,512

 

 

 

1,337

 

Income before taxes

$

5,114

 

 

$

2,442

 

 

$

16,691

 

 

$

10,808

 

 

Intersegment sales are not material.

Note 3 – Accounts receivable, net:

 

 

December 31,

 

 

September 30,

 

 

2019

 

 

2020

 

 

(In thousands)

 

Accounts receivable, net:

 

 

 

 

 

 

 

Security Products

$

10,321

 

 

$

9,571

 

Marine Components

 

1,619

 

 

 

2,776

 

Allowance for doubtful accounts

 

(70

)

 

 

(70

)

Total accounts receivable, net

$

11,870

 

 

$

12,277

 

 

 

Note 4 – Inventories, net:

 

 

December 31,

 

 

September 30,

 

 

2019

 

 

2020

 

 

(In thousands)

 

Raw materials:

 

 

 

 

 

 

 

Security Products

$

2,134

 

 

$

2,542

 

Marine Components

 

807

 

 

 

816

 

Total raw materials

 

2,941

 

 

 

3,358

 

Work-in-process:

 

 

 

 

 

 

 

Security Products

 

9,138

 

 

 

9,721

 

Marine Components

 

2,633

 

 

 

2,434

 

Total work-in-process

 

11,771

 

 

 

12,155

 

Finished goods:

 

 

 

 

 

 

 

Security Products

 

2,582

 

 

 

2,376

 

Marine Components

 

1,054

 

 

 

1,277

 

Total finished goods

 

3,636

 

 

 

3,653

 

Total inventories, net

$

18,348

 

 

$

19,166

 

 

- 8 -


Note 5 – Accounts payable and accrued liabilities:

 

 

December 31,

 

 

September 30,

 

 

2019

 

 

2020

 

 

(In thousands)

 

Accounts payable:

 

 

 

 

 

 

 

Security Products

$

1,975

 

 

$

2,040

 

Marine Components

 

539

 

 

 

653

 

Accrued liabilities:

 

 

 

 

 

 

 

Employee benefits

 

8,331

 

 

 

7,010

 

Customer tooling

 

264

 

 

 

184

 

Taxes other than on income

 

350

 

 

 

701

 

Other

 

619

 

 

 

487

 

Total accounts payable and accrued liabilities

$

12,078

 

 

$

11,075

 

 

 

 

Note 6 – Provision for income taxes:

 

 

Three months ended

 

 

Nine months ended

 

 

September 30,

 

 

September 30,

 

 

2019

 

 

2020

 

 

2019

 

 

2020

 

 

(In thousands)

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expected tax expense, at the U.S. federal statutory

   income tax rate of 21%

$

1,074

 

 

$

513

 

 

$

3,505

 

 

$

2,270

 

State income taxes

 

185

 

 

 

90

 

 

 

588

 

 

 

384

 

FDII benefit

 

(22

)

 

 

(7

)

 

 

(170

)

 

 

(39

)

Other, net

 

(10

)

 

 

14

 

 

 

-

 

 

 

25

 

Total income tax expense

$

1,227

 

 

$

610

 

 

$

3,923

 

 

$

2,640

 

 

We qualify for the foreign derived intangible income (FDII) deduction.  We recognized a current cash tax benefit of $39,000 in the first nine months of 2020 and $170,000 in the first nine months of 2019 ($98,000 of our 2019 current cash tax benefit is related to 2018).

On March 27, 2020, the “Coronavirus Aid, Relief and Economic Security (CARES) Act” was signed into law in response to the COVID-19 pandemic. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, modifications to the limitation of business interest for 2019 and 2020 and technical corrections to tax depreciation methods for qualified improvement property.  We have evaluated the relevant provisions of the CARES Act and determined the impact is not material to our tax provision.

 

 

Note 7 – Financial instruments:

The following table presents the financial instruments that are not carried at fair value but which require fair value disclosure:

 

 

December 31,

 

 

September 30,

 

 

2019

 

 

2020

 

 

Carrying

 

 

Fair

 

 

Carrying

 

 

Fair

 

 

amount

 

 

value

 

 

amount

 

 

value

 

 

(In thousands)

 

Cash and cash equivalents

$

63,255

 

 

$

63,255

 

 

$

65,075

 

 

$

65,075

 

Accounts receivable, net

 

11,870

 

 

 

11,870

 

 

 

12,277

 

 

 

12,277

 

Accounts payable

 

2,514

 

 

 

2,514

 

 

 

2,693

 

 

 

2,693

 

 

Due to their near-term maturities, the carrying amounts of accounts receivable and accounts payable are considered equivalent to fair value.

- 9 -


 

Note 8 – Related party transactions:

From time to time, we may have loans and advances outstanding between us and various related parties pursuant to term and demand notes.  We generally enter into these loans and advances for cash management purposes.  When we loan funds to related parties, we are generally able to earn a higher rate of return on the loan than we would earn if we invested the funds in other instruments, and when we borrow from related parties, we are generally able to pay a lower rate of interest than we would pay if we had incurred third-party indebtedness.  While certain of these loans to affiliates may be of a lesser credit quality than cash equivalent instruments otherwise available to us, we believe we have considered the credit risks in the terms of the applicable loans.  In this regard, we have an unsecured revolving demand promissory note with Valhi whereby we agreed to loan Valhi up to $40 million.  Our loan to Valhi, as amended,  bears interest at prime plus 1.00%, payable quarterly, with all principal due on demand, but in any event no earlier than December 31, 2021.  Loans made to Valhi at any time under the agreement are at our discretion.  At September 30, 2020, the outstanding principal balance receivable from Valhi under the promissory note was $30.5 million. Interest income (including unused commitment fees) on our loan to Valhi was $1.9 million and $1.1 million for the nine months ended September 30, 2019 and 2020, respectively.

 

Note 9 – Recent accounting pronouncements:

Adopted

In December 2019, the Financial Accounting Standards Board issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which changes the accounting for certain income tax transactions and reduces complexity in accounting for income taxes in certain areas.  The ASU introduces new guidance including providing a policy election for an entity to not allocate consolidated current and deferred tax expense when a member of a consolidated tax return is not subject to income tax in its separate financial statements and is a disregarded entity by the taxing authority; and providing guidance to evaluate whether a step-up in tax basis of goodwill relates to a business combination in which book goodwill was recognized or a separate transaction.  The ASU also changes existing guidance in a number of areas, including: the method of making an intraperiod allocation of total income tax expense if there is a loss in continuing operations and gains outside of continuing operations; accounting for tax law changes and year-to-date losses in interim periods; and determining how to apply the income tax guidance to franchise taxes that are partially based on income.  We adopted this ASU in the first quarter of 2020 and the adoption of this standard did not have a material effect on our Condensed Consolidated Financial Statements.

 

 

 

- 10 -


ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Business Overview

We are a leading manufacturer of engineered components utilized in a variety of applications and industries.  Through our Security Products segment we manufacture mechanical and electronic cabinet locks and other locking mechanisms used in recreational transportation, postal, office and institutional furniture, cabinetry, tool storage and healthcare applications.  We also manufacture stainless steel exhaust systems, gauges, throttle controls, wake enhancement systems and trim tabs for the recreational marine and other industries through our Marine Components segment.

General

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Statements in this Quarterly Report that are not historical facts are forward-looking in nature and represent management’s beliefs and assumptions based on currently available information. In some cases, you can identify forward-looking statements by the use of words such as “believes,” “intends,” “may,” “should,” “could,” “anticipates,” “expects” or comparable terminology, or by discussions of strategies or trends. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we do not know if these expectations will be correct. Such statements by their nature involve substantial risks and uncertainties that could significantly impact expected results. Actual future results could differ materially from those predicted. The factors that could cause actual future results to differ materially from those described herein are the risks and uncertainties discussed in this Quarterly Report and those described from time to time in our other filings with the SEC and include, but are not limited to, the following:

 

Future demand for our products,

 

Changes in our raw material and other operating costs (such as zinc, brass, aluminum, steel and energy costs) and our ability to pass those costs on to our customers or offset them with reductions in other operating costs,

 

Price and product competition from low-cost manufacturing sources (such as China),

 

The impact of pricing and production decisions,

 

Customer and competitor strategies including substitute products,

 

Uncertainties associated with the development of new products and product features,

 

Future litigation,

 

Our ability to protect or defend our intellectual property rights,

 

Potential difficulties in integrating future acquisitions,

 

Decisions to sell operating assets other than in the ordinary course of business,

 

Environmental matters (such as those requiring emission and discharge standards for existing and new facilities),

 

The ultimate outcome of income tax audits, tax settlement initiatives or other tax matters, including future tax reform,

 

The impact of current or future government regulations (including employee healthcare benefit related regulations),

 

General global economic and political conditions that disrupt or introduce instability into our supply chain, impact our customers’ level of demand or our customers’ perception regarding demand or impair our ability to operate our facilities (including changes in the level of gross domestic product in various regions of the world, natural disasters, terrorist acts, global conflicts and public health crises such as COVID-19),

 

Operating interruptions (including, but not limited to labor disputes, hazardous chemical leaks, natural disasters, fires, explosions, unscheduled or unplanned downtime, transportation interruptions, cyber-attacks and public health crises such as COVID-19); and

 

Possible disruption of our business or increases in the cost of doing business resulting from terrorist activities or global conflicts.

Should one or more of these risks materialize or if the consequences worsen, or if the underlying assumptions prove incorrect, actual results could differ materially from those currently forecasted or expected. We disclaim any intention or obligation to update or revise any forward-looking statement whether as a result of changes in information, future events or otherwise.

- 11 -


Operating Income Overview

We experienced normal sales volumes and operations during the first quarter of 2020.  Beginning in late March 2020 as a result of the COVID-19 pandemic, we began receiving requests from certain customers of both our Security Products and Marine Components segments to postpone shipments, in some cases because our customers’ production facilities were temporarily closed. We operate three facilities, each of which specializes in certain manufacturing processes and is therefore dependent upon the other facilities to some extent to manufacture finished goods. With the onset of COVID-19, within each facility we enhanced cleaning and sanitization procedures, mandated social distancing and implemented other health and safety protocols. For our sales, the second quarter of 2020 was the quarter most impacted by COVID-19 related order cancellations and delays. In the third quarter, we experienced significant recovery in sales, particularly in our Marine Segment, though not to the level we would have expected prior to the pandemic. Our operating income has not recovered to the extent our sales have recovered due to a decline in gross margins discussed below.

We reported operating income of $2.1 million in the third quarter of 2020 compared to $4.3 million in the same period of 2019. Operating income for the first nine months of 2020 was $9.5 million compared to $14.2 million for the comparable period in 2019.

We sell a large number of products that have a wide variation in selling price and manufacturing cost, which results in certain practical limitations on our ability to quantify the impact of changes in individual product sales quantities and selling prices on our net sales, cost of goods sold and gross profit.

Results of Operations

 

 

Three months ended

 

 

September 30,

 

 

2019

 

 

%

 

 

2020

 

 

%

 

 

(Dollars in thousands)

 

Net sales

$

29,703

 

 

 

100.0

%

 

$

28,426

 

 

 

100.0

%

Cost of sales

 

20,227

 

 

 

68.1

 

 

 

21,098

 

 

 

74.2

 

Gross margin

 

9,476

 

 

 

31.9

 

 

 

7,328

 

 

 

25.8

 

Operating costs and expenses

 

5,210

 

 

 

17.5

 

 

 

5,246

 

 

 

18.5

 

Operating income

$

4,266

 

 

 

14.4

%

 

$

2,082

 

 

 

7.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

September 30,

 

 

2019

 

 

%

 

 

2020

 

 

%

 

 

(Dollars in thousands)

 

Net sales

$

94,610

 

 

 

100.0

%

 

$

84,537

 

 

 

100.0

%