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cix-10q_20190630.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarter ended June 30, 2019

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 July 31, 2019, the registrant had 12,443,057 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, 2018 and June 30, 2019 (unaudited)	- 3 -
	Condensed Consolidated Statements of Income (unaudited) – Three and six months ended June 30, 2018 and 2019	- 4 -
	Condensed Consolidated Statements of Stockholders’ Equity (unaudited) – Three and six months ended June 30, 2018 and 2019	- 5 -
	Condensed Consolidated Statements of Cash Flows (unaudited) - Six months ended June 30, 2018 and 2019	- 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	- 15 -
Item 4.	Controls and Procedures	- 15 -
Part II.	OTHER INFORMATION
Item 1A.	Risk Factors	- 17 -
Item 6.	Exhibits	- 17 -
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,		June 30,
	2018		2019
ASSETS			(unaudited)
Current assets:
Cash and cash equivalents	$	45,414	$	41,917
Accounts receivable, net		12,140		14,904
Inventories, net		17,102		17,830
Prepaid expenses and other		1,629		946
Total current assets		76,285		75,597
Other assets:
Note receivable from affiliate		34,000		40,000
Goodwill		23,742		23,742
Other noncurrent		590		590
Total other assets		58,332		64,332
Property and equipment:
Land		4,940		4,940
Buildings		22,835		22,807
Equipment		67,073		67,259
Construction in progress		603		662
		95,451		95,668
Less accumulated depreciation		63,639		64,164
Net property and equipment		31,812		31,504
Total assets	$	166,429	$	171,433

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	12,504	$	10,514
Income taxes payable to affiliates		1,165		715
Total current liabilities		13,669		11,229
Noncurrent liabilities -
Deferred income taxes		3,198		3,385
Stockholders' equity:
Preferred stock		—		—
Class A common stock		124		124
Additional paid-in capital		55,751		55,869
Retained earnings		93,687		100,826
Total stockholders' equity		149,562		156,819
Total liabilities and stockholders’ equity	$	166,429	$	171,433

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				Six months ended
	June 30,				June 30,
	2018		2019		2018		2019
	(unaudited)				(unaudited)
Net sales	$	32,385	$	33,730	$	60,798	$	64,907
Cost of goods sold		21,150		22,791		40,061		44,344
Gross profit		11,235		10,939		20,737		20,563
Selling, general and administrative expense		5,251		5,317		10,380		10,650
Operating income		5,984		5,622		10,357		9,913
Interest income		640		828		1,212		1,664
Income before taxes		6,624		6,450		11,569		11,577
Provision for income taxes		1,627		1,555		2,846		2,696
Net income	$	4,997	$	4,895	$	8,723	$	8,881

Basic and diluted net income per common share	$	0.40	$	0.39	$	0.70	$	0.71

Basic and diluted weighted average shares outstanding		12,430		12,439		12,428		12,437

See accompanying Notes to Condensed Consolidated Financial Statements.

- 4 -

COMPX INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(unaudited)

	For the three and six months ended June 30, 2018
					Additional						Total
	Common stock				paid-in			Retained			stockholders'
	Class A		Class B		capital			earnings			equity
Balance at December 31, 2017	$	24	$	100	$	55,612		$	80,849		$	136,585
Net income		—		—		—			3,726			3,726
Cash dividends ($0.05 per share)		—		—		—			(621	)		(621	)
Balance at March 31, 2018		24		100		55,612			83,954			139,690

Net income		—		—		—			4,997			4,997
Issuance of common stock		—		—		139			—			139
Cash dividends ($0.05 per share)		—		—		—			(622	)		(622	)
Balance at June 30, 2018	$	24	$	100	$	55,751		$	88,329		$	144,204



	For the three and six months ended June 30, 2019
	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		—		—		3,986			3,986
Cash dividends ($0.07 per share)		—		—		(870	)		(870	)
Balance at March 31, 2019		124		55,751		96,803			152,678

Net income		—		—		4,895			4,895
Issuance of common stock		—		118		—			118
Cash dividends ($0.07 per share)		—		—		(872	)		(872	)
Balance at June 30, 2019	$	124	$	55,869	$	100,826		$	156,819

See accompanying Notes to Condensed Consolidated Financial Statements.

- 5 -

COMPX INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Six months ended
	June 30,
	2018			2019
	(unaudited)
Cash flows from operating activities:
Net income	$	8,723		$	8,881
Depreciation and amortization		1,733			1,808
Deferred income taxes		142			187
Other, net		259			357
Change in assets and liabilities:
Accounts receivable, net		(3,324	)		(2,770	)
Inventories, net		(1,300	)		(839	)
Accounts payable and accrued liabilities		(898	)		(1,929	)
Accounts with affiliates		667			93
Prepaids and other, net		84			140
Net cash provided by operating activities		6,086			5,928
Cash flows from investing activities:
Capital expenditures		(1,366	)		(1,811	)
Proceeds from sale of fixed assets		-			128
Note receivable from affiliate:
Collections		25,900			22,100
Advances		(25,300	)		(28,100	)
Net cash used in investing activities		(766	)		(7,683	)
Cash flows from financing activities -
Dividends paid		(1,243	)		(1,742	)
Cash and cash equivalents - net change from:
Operating, investing and financing activities		4,077			(3,497	)
Balance at beginning of period		29,655			45,414
Balance at end of period	$	33,732		$	41,917
Supplemental disclosures -
Cash paid for income taxes	$	2,036		$	2,955

See accompanying Notes to Condensed Consolidated Financial Statements.

- 6 -

COMPX INTERNATIONAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019

(unaudited)

Note 1 – Organization and basis of presentation:

Organization. We (NYSE American: CIX) are 86% owned by NL Industries, Inc. (NYSE: NL) at June 30, 2019. We manufacture and sell component products (security products and recreational marine components). At June 30, 2019, Valhi, Inc. (NYSE: VHI) owns 83% of NL’s outstanding common stock and a wholly-owned subsidiary of Contran Corporation owns 92% of Valhi’s outstanding common stock. At June 30, 2019, all of Contran’s outstanding voting stock was held by a family trust established for the benefit of Lisa K. Simmons and Serena Simmons Connelly and their children, for which Ms. Simmons and Ms. Connelly were co-trustees (the “Family Trust”), or was held directly by Ms. Simmons and Ms. Connelly or various other family trusts established for the benefit of Ms. Simmons and Ms. Connelly and their children and for which Ms. Simmons or Ms. Connelly, applicable, serve as trustee (collectively, the “Other Trusts”). Consequently, at June 30, 2019, Ms. Simmons and Ms. Connelly may be deemed to control Contran, Valhi, NL and us.

Effective July 16, 2019, and upon entry of an agreed final judgment by the probate court of Dallas County in the state of Texas, Ms. Simmons and Ms. Connelly appointed two third parties as successor co-trustees of the Family Trust. Ms. Simmons and Ms. Connelly retain the ability to appoint qualifying successor trustees of the Family Trust if either or both of the third party successor trustees resign or otherwise do not serve as trustee. Following such appointment, a majority of Contran’s outstanding voting stock is held directly by Ms. Simmons and Ms. Connelly and the Other Trusts and the remainder of Contran’s outstanding voting stock is held by the Family Trust. Consequently, as of July 16, 2019, Ms. Simmons and Ms. Connelly and the trustees of the Family Trust may be deemed to control Contran 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, 2018 that we filed with the Securities and Exchange Commission (“SEC”) on February 27, 2019 (the “2018 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, 2018 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, 2018) 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 June 30, 2019 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 2018 Consolidated Financial Statements contained in our 2018 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 June 30, 2018, December 31, 2018 and June 30, 2019. The actual dates of our annual and quarterly periods are July 1, 2018, December 30, 2018 and June 30, 2019, 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.

- 7 -

Note 2 – Business segment information:

	Three months ended						Six months ended
	June 30,						June 30,
	2018			2019			2018			2019
	(In thousands)						(In thousands)
Net sales:
Security Products	$	27,248		$	26,927		$	51,304		$	51,631
Marine Components		5,137			6,803			9,494			13,276
Total net sales	$	32,385		$	33,730		$	60,798		$	64,907

Operating income (loss):
Security Products	$	6,814		$	6,048		$	12,426		$	11,124
Marine Components		937			1,280			1,523			2,181
Corporate operating expenses		(1,767	)		(1,706	)		(3,592	)		(3,392	)
Total operating income		5,984			5,622			10,357			9,913
Interest income		640			828			1,212			1,664
Income before taxes	$	6,624		$	6,450		$	11,569		$	11,577

Intersegment sales are not material.

Note 3 – Accounts receivable, net:

	December 31,			June 30,
	2018			2019
	(In thousands)
Accounts receivable, net:
Security Products	$	10,596		$	12,622
Marine Components		1,614			2,352
Allowance for doubtful accounts		(70	)		(70	)
Total accounts receivable, net	$	12,140		$	14,904

Note 4 – Inventories, net:

	December 31,		June 30,
	2018		2019
	(In thousands)
Raw materials:
Security Products	$	2,001	$	2,390
Marine Components		660		833
Total raw materials		2,661		3,223
Work-in-process:
Security Products		9,018		9,174
Marine Components		2,112		2,235
Total work-in-process		11,130		11,409
Finished goods:
Security Products		2,363		2,294
Marine Components		948		904
Total finished goods		3,311		3,198
Total inventories, net	$	17,102	$	17,830

- 8 -

Note 5 – Accounts payable and accrued liabilities:

	December 31,		June 30,
	2018		2019
	(In thousands)
Accounts payable:
Security Products	$	2,708	$	2,290
Marine Components		527		897
Accrued liabilities:
Employee benefits		8,068		5,746
Customer tooling		334		346
Taxes other than on income		328		459
Other		539		776
Total accounts payable and accrued liabilities	$	12,504	$	10,514

Note 6 – Provision for income taxes:

	Six months ended
	June 30,
	2018		2019
	(In thousands)

Expected tax expense, at the U.S. federal statutory income tax rate of 21%	$	2,430	$	2,431
State income taxes		396		403
FDII benefit		-		(148	)
Other, net		20		10
Total income tax expense	$	2,846	$	2,696

Under the 2017 Tax Act enacted into law on December 22, 2017, beginning in 2018, domestic corporations who are U.S. exporters with no foreign operations may be eligible for a deduction under the foreign derived intangible income provisions. We qualify for this deduction and recognized a current cash tax benefit of $148,000 in the first six months of 2019 ($98,000 of such current cash tax benefit is related to 2018).

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,				June 30,
	2018				2019
	Carrying		Fair		Carrying		Fair
	amount		value		amount		value
	(In thousands)
Cash and cash equivalents	$	45,414	$	45,414	$	41,917	$	41,917
Accounts receivable, net		12,140		12,140		14,904		14,904
Accounts payable		3,235		3,235		3,187		3,187

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

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

- 9 -

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%, (6.5% at June 30, 2019) payable quarterly, with all principal due on demand, but in any event no earlier than December 31, 2020. Loans made to Valhi at any time under the agreement are at our discretion. At June 30, 2019, the outstanding principal balance receivable from Valhi under the promissory note was $40.0 million. Interest income (including unused commitment fees) on our loan to Valhi was $1.0 million and $1.2 million for the six months ended June 30, 2018 and 2019, respectively.

Note 9 – Recent accounting pronouncements:

Adopted

On January 1, 2019, we adopted ASU 2016-02, Leases (Topic 842), which was a comprehensive rewriting of the lease accounting guidance which aimed to increase comparability and transparency with regard to lease transactions. The primary change for leases currently classified as operating leases is the balance sheet recognition of a lease asset for the right to use the underlying asset and a lease liability for the lessee’s obligation to make payments. Due to our minimal utilization of lease financing, the adoption of this standard did not have a material effect on our 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, 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 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 introduce instability into the U.S. economy (such as changes in the level of gross domestic product in various regions of the world),

•

Operating interruptions (including, but not limited to labor disputes, hazardous chemical leaks, natural disasters, fires, explosions, unscheduled or unplanned downtime, transportation interruptions and cyber-attacks); 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.

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Operating Income Overview

We reported operating income of $5.6 million in the second quarter of 2019 compared to $6.0 million in the same period of 2018. Operating income for the first six months of 2019 was $9.9 million compared to $10.4 million for the comparable period in 2018. The decrease in operating income in 2019 from 2018 is primarily due to increased labor rates and associated payroll costs at Security Products, partially offset by the effect of higher sales volumes at Marine Components.

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. In addition, small variations in period-to-period net sales, cost of goods sold and gross profit can result from changes in the relative mix of our products sold.

Results of Operations

	Three months ended
	June 30,
	2018		%			2019		%
	(Dollars in thousands)
Net sales	$	32,385		100.0	%	$	33,730		100.0	%
Cost of goods sold		21,150		65.3			22,791		67.6
Gross profit		11,235		34.7			10,939		32.4
Operating costs and expenses		5,251		16.2			5,317		15.8
Operating income	$	5,984		18.5		$	5,622		16.7

	Six months ended
	June 30,
	2018		%			2019		%
	(Dollars in thousands)
Net sales	$	60,798		100.0	%	$	64,907		100.0	%
Cost of goods sold		40,061		65.9			44,344		68.3
Gross profit		20,737		34.1			20,563		31.7
Operating costs and expenses		10,380		17.1			10,650		16.4
Operating income	$	10,357		17.0		$	9,913		15.3

Net sales. Net sales increased $1.3 million and $4.1 million in the second quarter and for the first six months of 2019, respectively, compared to the same periods in 2018. The increase in sales is due to higher Marine Component sales in both periods, primarily surf pipes and wake enhancement systems to an original equipment boat manufacturer. Relative changes in selling prices did not have a material impact on net sales comparisons.

Cost of goods sold and gross profit. Cost of goods sold as a percentage of sales for the second quarter and first six months of 2019 was approximately 2% higher than the same periods in 2018. As a result, gross profit as a percentage of sales decreased over the same periods. The decrease in gross profit percentage is primarily the result of increased labor rates due to regional pressure on wages for certain skilled labor positions and associated payroll costs at Security Products as well as a less favorable customer and product mix at Marine Components. Gross profit dollars for the second quarter and first six months of 2019 were comparable to the same periods in 2018.

Operating costs and expenses. Operating costs and expenses consist primarily of sales and administrative-related personnel costs, sales commissions and advertising expenses, as well as gains and losses on plant, property and equipment. Operating costs and expenses for the second quarter and first six months of 2019 were comparable to the same periods in 2018.

Operating income. As a percentage of net sales, operating income for the second quarter and first six months of 2019 decreased compared to the same periods of 2018 and was primarily impacted by the factors impacting cost of goods sold, gross margin and operating costs discussed above.

Provision for income taxes. A tabular reconciliation of our actual tax provision to the U.S. federal statutory income tax rate is included in Note 6 to the Condensed Consolidated Financial Statements. Our operations are wholly within the U.S. and therefore our effective income tax rate is primarily reflective of the U.S. federal statutory rate and applicable state taxes.

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Segment Results

The key performance indicator for our segments is operating income.

Three months ended

Six months ended

June 30,

2018

2019

Change

2018

2019

Change

(Dollars in thousands)

Net sales:

Security Products