SEC Filing Html Data

cix-10q_20190930.htm

 

 

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, 2019

 

 

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

ECHANGE 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 24, 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 September 30, 2019 (unaudited)

  - 3 -

 

 

  

 

Condensed Consolidated Statements of Income (unaudited) – Three and nine months ended September 30, 2018 and 2019

  - 4 -

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity (unaudited) – Three and nine months ended September 30, 2018 and 2019

  - 5 -

 

 

  

 

Condensed Consolidated Statements of Cash Flows (unaudited) – Nine months ended September 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,

 

 

September 30,

 

 

2018

 

 

2019

 

ASSETS

 

 

 

 

(unaudited)

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

45,414

 

 

$

50,224

 

Accounts receivable, net

 

12,140

 

 

 

13,433

 

Inventories, net

 

17,102

 

 

 

18,826

 

Prepaid expenses and other

 

1,629

 

 

 

1,680

 

Total current assets

 

76,285

 

 

 

84,163

 

Other assets:

 

 

 

 

 

 

 

Note receivable from affiliate

 

34,000

 

 

 

36,700

 

Goodwill

 

23,742

 

 

 

23,742

 

Other noncurrent

 

590

 

 

 

590

 

Total other assets

 

58,332

 

 

 

61,032

 

Property and equipment:

 

 

 

 

 

 

 

Land

 

4,940

 

 

 

4,940

 

Buildings

 

22,835

 

 

 

22,856

 

Equipment

 

67,073

 

 

 

67,221

 

Construction in progress

 

603

 

 

 

963

 

 

 

95,451

 

 

 

95,980

 

Less accumulated depreciation

 

63,639

 

 

 

64,765

 

Net property and equipment

 

31,812

 

 

 

31,215

 

Total assets

$

166,429

 

 

$

176,410

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

$

12,504

 

 

$

12,314

 

Income taxes payable to affiliates

 

1,165

 

 

 

818

 

Total current liabilities

 

13,669

 

 

 

13,132

 

Noncurrent liabilities -

 

 

 

 

 

 

 

Deferred income taxes

 

3,198

 

 

 

3,443

 

Stockholders' equity:

 

 

 

 

 

 

 

Preferred stock

 

 

 

 

 

Class A common stock

 

124

 

 

 

124

 

Additional paid-in capital

 

55,751

 

 

 

55,869

 

Retained earnings

 

93,687

 

 

 

103,842

 

Total stockholders' equity

 

149,562

 

 

 

159,835

 

Total liabilities and stockholders’ equity

$

166,429

 

 

$

176,410

 

 

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,

 

 

2018

 

 

2019

 

 

2018

 

 

2019

 

 

(unaudited)

 

 

(unaudited)

 

Net sales

$

30,029

 

 

$

29,703

 

 

$

90,827

 

 

$

94,610

 

Cost of sales

 

20,435

 

 

 

20,227

 

 

 

60,494

 

 

 

64,571

 

Gross margin

 

9,594

 

 

 

9,476

 

 

 

30,333

 

 

 

30,039

 

Selling, general and administrative expense

 

5,074

 

 

 

5,210

 

 

 

15,454

 

 

 

15,860

 

Operating income

 

4,520

 

 

 

4,266

 

 

 

14,879

 

 

 

14,179

 

Interest income

 

697

 

 

 

848

 

 

 

1,908

 

 

 

2,512

 

Income before taxes

 

5,217

 

 

 

5,114

 

 

 

16,787

 

 

 

16,691

 

Provision for income taxes

 

1,286

 

 

 

1,227

 

 

 

4,132

 

 

 

3,923

 

Net income

$

3,931

 

 

$

3,887

 

 

$

12,655

 

 

$

12,768

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net income per common share

$

0.32

 

 

$

0.31

 

 

$

1.02

 

 

$

1.03

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average shares outstanding

 

12,436

 

 

 

12,443

 

 

 

12,431

 

 

 

12,439

 

 

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 nine months ended September 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

3,931

 

 

 

3,931

 

Share conversion

 

100

 

 

 

(100

)

 

 

 

 

 

 

 

 

 

Cash dividends ($0.05 per share)

 

 

 

 

 

 

 

 

 

 

(621

)

 

 

(621

)

Balance at September 30, 2018

$

124

 

 

$

 

 

$

55,751

 

 

$

91,639

 

 

$

147,514

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three and nine months ended September 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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,

 

 

2018

 

 

2019

 

 

(unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

$

12,655

 

 

$

12,768

 

Depreciation and amortization

 

2,588

 

 

 

2,738

 

Deferred income taxes

 

181

 

 

 

245

 

Other, net

 

316

 

 

 

428

 

Change in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable, net

 

(2,910

)

 

 

(1,308

)

Inventories, net

 

(1,935

)

 

 

(1,888

)

Accounts payable and accrued liabilities

 

1,211

 

 

 

(130

)

Accounts with affiliates

 

718

 

 

 

(432

)

Prepaids and other, net

 

(29

)

 

 

34

 

Net cash provided by operating activities

 

12,795

 

 

 

12,455

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Capital expenditures

 

(2,042

)

 

 

(2,453

)

Proceeds from sale of fixed assets, net

 

-

 

 

 

121

 

Note receivable from affiliate:

 

 

 

 

 

 

 

Collections

 

44,200

 

 

 

25,400

 

Advances

 

(39,000

)

 

 

(28,100

)

Net cash provided by (used in) investing activities

 

3,158

 

 

 

(5,032

)

Cash flows from financing activities -

 

 

 

 

 

 

 

Dividends paid

 

(1,865

)

 

 

(2,613

)

Cash and cash equivalents - net change from:

 

 

 

 

 

 

 

Operating, investing and financing activities

 

14,088

 

 

 

4,810

 

Balance at beginning of period

 

29,655

 

 

 

45,414

 

Balance at end of period

$

43,743

 

 

$

50,224

 

Supplemental disclosures -

 

 

 

 

 

 

 

Cash paid for income taxes

$

3,233

 

 

$

4,020

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

- 6 -


 

COMPX INTERNATIONAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 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 September 30, 2019.  We manufacture and sell component products (security products and recreational marine components).  At September 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 September 30, 2019, a majority of Contran’s outstanding voting stock is held directly by Lisa K. Simmons and Serena Simmons Connelly and various family trusts established for the benefit of Ms. Simmons and Ms. Connelly and their children and for which Ms. Simmons or Ms. Connelly, as applicable, serves as trustee. In addition, each of Ms. Simmons and Ms. Connelly serves as co-chair of the Contran board of directors.  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 Ms. Connelly and their children and for which a third-party financial institution serves as trustee.  Consequently, at September 30, 2019, Ms. Simmons, Ms. Connelly 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, 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 September 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 September 30, 2018, December 31, 2018 and September 30, 2019.  The actual dates of our annual and quarterly periods are September 30, 2018, December 30, 2018 and September 29, 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

 

 

Nine months ended

 

 

September 30,

 

 

September 30,

 

 

2018

 

 

2019

 

 

2018

 

 

2019

 

 

(In thousands)

 

 

(In thousands)

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Security Products

$

24,541

 

 

$

23,405

 

 

$

75,845

 

 

$

75,036

 

Marine Components

 

5,488

 

 

 

6,298

 

 

 

14,982

 

 

 

19,574

 

Total net sales

$

30,029

 

 

$

29,703

 

 

$

90,827

 

 

$

94,610

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Security Products

$

5,335

 

 

$

4,866

 

 

$

17,761

 

 

$

15,990

 

Marine Components

 

812

 

 

 

1,042

 

 

 

2,335

 

 

 

3,223

 

Corporate operating expenses

 

(1,627

)

 

 

(1,642

)

 

 

(5,217

)

 

 

(5,034

)

Total operating income

 

4,520

 

 

 

4,266

 

 

 

14,879

 

 

 

14,179

 

Interest income

 

697

 

 

 

848

 

 

 

1,908

 

 

 

2,512

 

Income before taxes

$

5,217

 

 

$

5,114

 

 

$

16,787

 

 

$

16,691

 

 

Intersegment sales are not material.

 

Note 3 – Accounts receivable, net:

 

 

December 31,

 

 

September 30,

 

 

2018

 

 

2019

 

 

(In thousands)

 

Accounts receivable, net:

 

 

 

 

 

 

 

Security Products

$

10,596

 

 

$

11,239

 

Marine Components

 

1,614

 

 

 

2,264

 

Allowance for doubtful accounts

 

(70

)

 

 

(70

)

Total accounts receivable, net

$

12,140

 

 

$

13,433

 

 

 

Note 4 – Inventories, net:

 

 

December 31,

 

 

September 30,

 

 

2018

 

 

2019

 

 

(In thousands)

 

Raw materials:

 

 

 

 

 

 

 

Security Products

$

2,001

 

 

$

2,505

 

Marine Components

 

660

 

 

 

808

 

Total raw materials

 

2,661

 

 

 

3,313

 

Work-in-process:

 

 

 

 

 

 

 

Security Products

 

9,018

 

 

 

9,258

 

Marine Components

 

2,112

 

 

 

2,694

 

Total work-in-process

 

11,130

 

 

 

11,952

 

Finished goods:

 

 

 

 

 

 

 

Security Products

 

2,363

 

 

 

2,603

 

Marine Components

 

948

 

 

 

958

 

Total finished goods

 

3,311

 

 

 

3,561

 

Total inventories, net

$

17,102

 

 

$

18,826

 

 

- 8 -


Note 5 – Accounts payable and accrued liabilities:

 

 

December 31,

 

 

September 30,

 

 

2018

 

 

2019

 

 

(In thousands)

 

Accounts payable:

 

 

 

 

 

 

 

Security Products

$

2,708

 

 

$

2,705

 

Marine Components

 

527

 

 

 

793

 

Accrued liabilities:

 

 

 

 

 

 

 

Employee benefits

 

8,068

 

 

 

7,084

 

Customer tooling

 

334

 

 

 

312

 

Taxes other than on income

 

328

 

 

 

667

 

Other

 

539

 

 

 

753

 

Total accounts payable and accrued liabilities

$

12,504

 

 

$

12,314

 

 

 

Note 6 – Provision for income taxes:

 

 

Nine months ended

 

 

September 30,

 

 

2018

 

 

2019

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

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

   income tax rate of 21%

$

3,525

 

 

$

3,505

 

State income taxes

 

576

 

 

 

588

 

FDII benefit

 

 

 

 

(170

)

Other, net

 

31

 

 

 

 

Total income tax expense

$

4,132

 

 

$

3,923

 

 

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 $170,000 in the first nine 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,

 

 

September 30,

 

 

2018

 

 

2019

 

 

Carrying

 

 

Fair

 

 

Carrying

 

 

Fair

 

 

amount

 

 

value

 

 

amount

 

 

value

 

 

(In thousands)

 

Cash and cash equivalents

$

45,414

 

 

$

45,414

 

 

$

50,224

 

 

$

50,224

 

Accounts receivable, net

 

12,140

 

 

 

12,140

 

 

 

13,433

 

 

 

13,433

 

Accounts payable

 

3,235

 

 

 

3,235

 

 

 

3,498

 

 

 

3,498

 

 

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 regard, we have an unsecured revolving demand promissory note with Valhi whereby we agreed to loan Valhi up to $40 million.  Our

- 9 -


loan to Valhi, as amended, bears interest at prime plus 1.00%, (6.0% at September 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 September 30, 2019, the outstanding principal balance receivable from Valhi under the promissory note was $36.7 million. Interest income (including unused commitment fees) on our loan to Valhi was $0.5 million and $0.6 million for each of the three month periods ended September 30, 2018 and 2019, respectively, and $1.6 million and $1.9 million for the nine months ended September 30, 2018 and 2019, respectively. On September 30, 2019 (one day after our fiscal quarterly period, but on the last day of the fiscal period for Valhi), we loaned $3.3 million to Valhi, increasing the outstanding principal balance receivable from Valhi under the promissory note to $40.0 million.

 

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.


- 11 -


Operating Income Overview

Operating income of $4.3 million in the third quarter of 2019 declined slightly from $4.5 million in the same period of 2018. Operating income for the first nine months of 2019 declined to $14.2 million compared to $14.9 million for the comparable period in 2018. The decrease in operating income in both periods of 2019 compared to the same periods in 2018 is primarily due to lower Security Products sales volumes and increased labor rates and associated payroll costs at our Security Products segment, partially offset by the effect of higher sales volumes at our Marine Components segment.  

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

Results of Operations

 

 

Three months ended

 

 

September 30,

 

 

2018

 

 

%

 

 

2019

 

 

%

 

 

(Dollars in thousands)

 

Net sales

$

30,029

 

 

 

100.0

%

 

$

29,703

 

 

 

100.0

%

Cost of sales

 

20,435

 

 

 

68.1

%

 

 

20,227

 

 

 

68.1

%

Gross margin

 

9,594

 

 

 

31.9

%

 

 

9,476

 

 

 

31.9

%

Operating costs and expenses

 

5,074

 

 

 

16.8

%

 

 

5,210

 

 

 

17.5

%

Operating income

$

4,520

 

 

 

15.1

%

 

$

4,266

 

 

 

14.4

%