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.
Index
Part I. |
|
FINANCIAL INFORMATION |
Page |
Item 1. |
|
Financial Statements |
|
|
|
Condensed Consolidated Balance Sheets – December 31, 2018 and September 30, 2019 (unaudited) |
- 3 - |
|
|
|
- 4 - |
|
|
|
- 5 - |
|
|
|
- 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. |
|
|
- 15 - |
Item 4. |
|
|
- 15 - |
Part II. |
|
|
|
Item 1A. |
|
|
- 17 - |
Item 6. |
|
|
- 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 -
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 -
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 -
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 -
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 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 |
% |
|
|
|