SEC Filing Html Data

cix-10q_20200630.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 June 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 July 30, 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 June 30, 2020 (unaudited)	- 3 -
	Condensed Consolidated Statements of Income (unaudited) – Three and six months ended June 30, 2019 and 2020	- 4 -
	Condensed Consolidated Statements of Stockholders’ Equity (unaudited) – Three and six months ended June 30, 2019 and 2020	- 5 -
	Condensed Consolidated Statements of Cash Flows (unaudited) - Six months ended June 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,		June 30,
	2019		2020
ASSETS			(unaudited)
Current assets:
Cash and cash equivalents	$	63,255	$	62,450
Accounts receivable, net		11,870		11,340
Inventories, net		18,348		21,818
Prepaid expenses and other		1,624		862
Total current assets		95,097		96,470
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		23,054
Equipment		67,718		68,739
Construction in progress		1,002		557
		96,707		97,290
Less accumulated depreciation		65,692		67,364
Net property and equipment		31,015		29,926
Total assets	$	178,544	$	181,228

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	12,078	$	9,629
Income taxes payable to affiliates		984		2,092
Total current liabilities		13,062		11,721
Noncurrent liabilities -
Deferred income taxes		3,287		3,347
Stockholders' equity:
Preferred stock		—		—
Class A common stock		124		124
Additional paid-in capital		55,869		55,987
Retained earnings		106,202		110,049
Total stockholders' equity		162,195		166,160
Total liabilities and stockholders’ equity	$	178,544	$	181,228

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,
	2019		2020		2019		2020
	(unaudited)				(unaudited)
Net sales	$	33,730	$	23,800	$	64,907	$	56,111
Cost of sales		22,791		16,434		44,344		38,314
Gross margin		10,939		7,366		20,563		17,797
Selling, general and administrative expense		5,317		4,997		10,650		10,408
Operating income		5,622		2,369		9,913		7,389
Interest income		828		370		1,664		977
Income before taxes		6,450		2,739		11,577		8,366
Provision for income taxes		1,555		674		2,696		2,030
Net income	$	4,895	$	2,065	$	8,881	$	6,336

Basic and diluted net income per common share	$	0.39	$	0.17	$	0.71	$	0.51

Basic and diluted weighted average shares outstanding		12,439		12,446		12,437		12,445

See accompanying Notes to Condensed Consolidated Financial Statements.

- 4 -

COMPX INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(unaudited)

	Three months ended June 30, 2019 and 2020 (unaudited)
	Class A		Additional					Total
	common		paid-in		Retained			stockholders'
	stock		capital		earnings			equity

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

Balance at March 31, 2020	$	124	$	55,869	$	109,229		$	165,222
Net income		—		—		2,065			2,065
Issuance of common stock		—		118		—			118
Cash dividends ($0.10 per share)		—		—		(1,245	)		(1,245	)
Balance at June 30, 2020	$	124	$	55,987	$	110,049		$	166,160

	Six months ended June 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		—		—		8,881			8,881
Issuance of common stock		—		118		—			118
Cash dividends ($0.14 per share)		—		—		(1,742	)		(1,742	)
Balance at June 30, 2019	$	124	$	55,869	$	100,826		$	156,819

Balance at December 31, 2019	$	124	$	55,869	$	106,202		$	162,195
Net income		—		—		6,336			6,336
Issuance of common stock		—		118		—			118
Cash dividends ($0.20 per share)		—		—		(2,489	)		(2,489	)
Balance at June 30, 2020	$	124	$	55,987	$	110,049		$	166,160

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,
	2019			2020
	(unaudited)
Cash flows from operating activities:
Net income	$	8,881		$	6,336
Depreciation and amortization		1,808			1,912
Deferred income taxes		187			60
Other, net		357			207
Change in assets and liabilities:
Accounts receivable, net		(2,770	)		529
Inventories, net		(839	)		(3,555	)
Accounts payable and accrued liabilities		(1,929	)		(2,415	)
Accounts with affiliates		93			1,674
Prepaids and other, net		140			197
Net cash provided by operating activities		5,928			4,945
Cash flows from investing activities:
Capital expenditures		(1,811	)		(861	)
Proceeds from sale of fixed assets		128			—
Note receivable from affiliate:
Collections		22,100			20,628
Advances		(28,100	)		(23,028	)
Net cash used in investing activities		(7,683	)		(3,261	)
Cash flows from financing activities -
Dividends paid		(1,742	)		(2,489	)
Cash and cash equivalents - net change from:
Operating, investing and financing activities		(3,497	)		(805	)
Balance at beginning of period		45,414			63,255
Balance at end of period	$	41,917		$	62,450
Supplemental disclosures -
Cash paid for income taxes	$	2,955		$	850

See accompanying Notes to Condensed Consolidated Financial Statements.

- 6 -

COMPX INTERNATIONAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(unaudited)

Note 1 – Organization and basis of presentation:

Organization. We (NYSE American: CIX) were 86% owned by NL Industries, Inc. (NYSE: NL) at June 30, 2020. We manufacture and sell component products (security products and recreational marine components). At June 30, 2020, Valhi, Inc. (NYSE: VHI) owned 83% of NL’s outstanding common stock and a wholly-owned subsidiary of Contran Corporation owned 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 June 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 June 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 June 30, 2019, December 31, 2019 and June 30, 2020. The actual dates of our annual and quarterly periods are June 30, 2019, December 29, 2019 and June 28, 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 second quarter of 2020 were significantly impacted by the COVID-19 pandemic 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						Six months ended
	June 30,						June 30,
	2019			2020			2019			2020
	(In thousands)						(In thousands)
Net sales:
Security Products	$	26,927		$	18,573		$	51,631		$	44,042
Marine Components		6,803			5,227			13,276			12,069
Total net sales	$	33,730		$	23,800		$	64,907		$	56,111

Operating income (loss):
Security Products	$	6,048		$	3,361		$	11,124		$	9,074
Marine Components		1,280			799			2,181			1,881
Corporate operating expenses		(1,706	)		(1,791	)		(3,392	)		(3,566	)
Total operating income		5,622			2,369			9,913			7,389
Interest income		828			370			1,664			977
Income before taxes	$	6,450		$	2,739		$	11,577		$	8,366

Intersegment sales are not material.

Note 3 – Accounts receivable, net:

	December 31,			June 30,
	2019			2020
	(In thousands)
Accounts receivable, net:
Security Products	$	10,321		$	9,114
Marine Components		1,619			2,296
Allowance for doubtful accounts		(70	)		(70	)
Total accounts receivable, net	$	11,870		$	11,340

Note 4 – Inventories, net:

	December 31,		June 30,
	2019		2020
	(In thousands)
Raw materials:
Security Products	$	2,134	$	2,546
Marine Components		807		815
Total raw materials		2,941		3,361
Work-in-process:
Security Products		9,138		10,744
Marine Components		2,633		2,905
Total work-in-process		11,771		13,649
Finished goods:
Security Products		2,582		3,385
Marine Components		1,054		1,423
Total finished goods		3,636		4,808
Total inventories, net	$	18,348	$	21,818

- 8 -

Note 5 – Accounts payable and accrued liabilities:

	December 31,		June 30,
	2019		2020
	(In thousands)
Accounts payable:
Security Products	$	1,975	$	2,085
Marine Components		539		705
Accrued liabilities:
Employee benefits		8,331		5,611
Customer tooling		264		207
Taxes other than on income		350		496
Other		619		525
Total accounts payable and accrued liabilities	$	12,078	$	9,629

Note 6 – Provision for income taxes:

	Three months ended						Six months ended
	June 30,						June 30,
	2019			2020			2019			2020
	(In thousands)						(In thousands)

Expected tax expense, at the U.S. federal statutory income tax rate of 21%	$	1,354		$	575		$	2,431		$	1,757
State income taxes		224			97			403			294
FDII benefit		(29	)		(4	)		(148	)		(32	)
Other, net		6			6			10			11
Total provision for income taxes	$	1,555		$	674		$	2,696		$	2,030

We qualify for the foreign derived intangible income (FDII) deduction. We recognized a current cash tax benefit of $32,000 in the first six months of 2020 and $148,000 in the first six 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,				June 30,
	2019				2020
	Carrying		Fair		Carrying		Fair
	amount		value		amount		value
	(In thousands)
Cash and cash equivalents	$	63,255	$	63,255	$	62,450	$	62,450
Accounts receivable, net		11,870		11,870		11,340		11,340
Accounts payable		2,514		2,514		2,790		2,790

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 June 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 $1.2 million and $0.8 million for the six months ended June 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,

•