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cix-10q_20210331.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

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

For the quarter ended March 31, 2021

 

 

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 April 29, 2021, the registrant had 12,401,157 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, 2020 and March 31, 2021 (unaudited)

  - 3 -

 

 

  

 

Condensed Consolidated Statements of Income (unaudited) – Three months ended March 31, 2020 and 2021

  - 4 -

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity (unaudited) – Three months ended March 31, 2020 and 2021

  - 5 -

 

 

  

 

Condensed Consolidated Statements of Cash Flows (unaudited) – Three months ended March 31, 2020 and 2021

  - 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 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

   - 18 -

 

Item 6.

  

 

Exhibits

   - 18 -

 

Items 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,

 

 

March 31,

 

 

2020

 

 

2021

 

ASSETS

 

 

 

 

(unaudited)

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

70,637

 

 

$

64,747

 

Accounts receivable, net

 

10,731

 

 

 

16,858

 

Inventories, net

 

18,337

 

 

 

18,153

 

Prepaid expenses and other

 

1,541

 

 

 

2,049

 

Total current assets

 

101,246

 

 

 

101,807

 

Other assets:

 

 

 

 

 

 

 

Note receivable from affiliate

 

29,500

 

 

 

29,200

 

Goodwill

 

23,742

 

 

 

23,742

 

Other noncurrent

 

607

 

 

 

591

 

Total other assets

 

53,849

 

 

 

53,533

 

Property and equipment:

 

 

 

 

 

 

 

Land

 

4,940

 

 

 

4,940

 

Buildings

 

23,146

 

 

 

23,146

 

Equipment

 

68,227

 

 

 

68,659

 

Construction in progress

 

1,010

 

 

 

935

 

 

 

97,323

 

 

 

97,680

 

Less accumulated depreciation

 

68,373

 

 

 

69,219

 

Net property and equipment

 

28,950

 

 

 

28,461

 

Total assets

$

184,045

 

 

$

183,801

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

$

12,198

 

 

$

9,497

 

Income taxes payable to affiliate

 

952

 

 

 

1,804

 

Total current liabilities

 

13,150

 

 

 

11,301

 

Noncurrent liabilities -

 

 

 

 

 

 

 

Deferred income taxes

 

3,239

 

 

 

3,404

 

Stockholders' equity:

 

 

 

 

 

 

 

Preferred stock

 

 

 

 

 

Class A common stock

 

124

 

 

 

124

 

Additional paid-in capital

 

55,987

 

 

 

55,232

 

Retained earnings

 

111,545

 

 

 

113,740

 

Total stockholders' equity

 

167,656

 

 

 

169,096

 

Total liabilities and stockholders’ equity

$

184,045

 

 

$

183,801

 

 

 

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

 

 

March 31,

 

 

2020

 

 

2021

 

 

(unaudited)

 

Net sales

$

32,311

 

 

$

35,924

 

Cost of sales

 

21,880

 

 

 

24,889

 

Gross margin

 

10,431

 

 

 

11,035

 

Selling, general and administrative expense

 

5,411

 

 

 

5,218

 

Operating income

 

5,020

 

 

 

5,817

 

Interest income

 

607

 

 

 

338

 

Income before income taxes

 

5,627

 

 

 

6,155

 

Provision for income taxes

 

1,356

 

 

 

1,470

 

Net income

$

4,271

 

 

$

4,685

 

 

 

 

 

 

 

 

 

Basic and diluted net income per common share

$

0.34

 

 

$

0.38

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average shares outstanding

 

12,443

 

 

 

12,443

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

- 4 -


 

 

COMPX INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(unaudited)

 

 

Three months ended March 31, 2020 and 2021 (unaudited)

 

 

Class A

 

 

Additional

 

 

 

 

 

 

 

 

 

 

Total

 

 

common

 

 

paid-in

 

 

Retained

 

 

Treasury

 

 

stockholders'

 

 

stock

 

 

capital

 

 

earnings

 

 

stock

 

 

equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2019

$

124

 

 

$

55,869

 

 

$

106,202

 

 

$

 

 

$

162,195

 

Net income

 

 

 

 

 

 

 

4,271

 

 

 

 

 

 

4,271

 

Cash dividends ($0.10 per share)

 

 

 

 

 

 

 

(1,244

)

 

 

 

 

 

(1,244

)

Balance at March 31, 2020

$

124

 

 

$

55,869

 

 

$

109,229

 

 

$

 

 

$

165,222

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2020

$

124

 

 

$

55,987

 

 

$

111,545

 

 

$

 

 

$

167,656

 

Net income

 

 

 

 

 

 

 

4,685

 

 

 

 

 

 

4,685

 

Cash dividends ($0.20 per share)

 

 

 

 

 

 

 

(2,490

)

 

 

 

 

 

(2,490

)

Treasury stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Acquired

 

 

 

 

 

 

 

 

 

 

(755

)

 

 

(755

)

  Retired

 

 

 

 

(755

)

 

 

 

 

 

755

 

 

 

 

Balance at March 31, 2021

$

124

 

 

$

55,232

 

 

$

113,740

 

 

$

 

 

$

169,096

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

- 5 -


 

COMPX INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

Three months ended

 

 

March 31,

 

 

2020

 

 

2021

 

 

(unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

$

4,271

 

 

$

4,685

 

Depreciation and amortization

 

950

 

 

 

949

 

Deferred income taxes

 

93

 

 

 

165

 

Other, net

 

62

 

 

 

35

 

Change in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable, net

 

(3,362

)

 

 

(6,127

)

Inventories, net

 

(673

)

 

 

151

 

Accounts payable and accrued liabilities

 

(3,011

)

 

 

(2,595

)

Accounts with affiliates

 

1,389

 

 

 

936

 

Prepaids and other, net

 

76

 

 

 

(576

)

Net cash used in operating activities

 

(205

)

 

 

(2,377

)

Cash flows from investing activities:

 

 

 

 

 

 

 

Capital expenditures

 

(360

)

 

 

(568

)

Note receivable from affiliate:

 

 

 

 

 

 

 

Collections

 

18,228

 

 

 

11,900

 

Advances

 

(15,628

)

 

 

(11,600

)

Net cash provided by (used in) investing activities

 

2,240

 

 

 

(268

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Dividends paid

 

(1,244

)

 

 

(2,490

)

Treasury stock acquired

 

 

 

 

(755

)

Net cash used in financing activities

 

(1,244

)

 

 

(3,245

)

Cash and cash equivalents - net change from:

 

 

 

 

 

 

 

Operating, investing and financing activities

 

791

 

 

 

(5,890

)

Balance at beginning of period

 

63,255

 

 

 

70,637

 

Balance at end of period

$

64,046

 

 

$

64,747

 

Supplemental disclosures -

 

 

 

 

 

 

 

Cash paid for income taxes

$

-

 

 

$

446

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

- 6 -


 

 

COMPX INTERNATIONAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(unaudited)

 

Note 1 – Organization and basis of presentation:

Organization. We (NYSE American: CIX) were approximately 87% owned by NL Industries, Inc. (NYSE: NL) at March 31, 2021. We manufacture and sell component products (security products and recreational marine components). At March 31, 2021, Valhi, Inc. (NYSE: VHI) owned approximately 83% of NL’s outstanding common stock and a wholly-owned subsidiary of Contran Corporation owned approximately 92% of Valhi’s outstanding common stock. A majority of Contran's outstanding voting stock is held directly by Lisa K. Simmons and various family trusts established for the benefit of Ms. Simmons, Thomas C. Connelly (the husband of Ms. Simmons’ late sister) and their children and for which Ms. Simmons or Mr. Connelly, as applicable, serve as trustee (collectively, the “Other Trusts”). With respect to the Other Trusts for which Mr. Connelly serves as trustee, he is required to vote the shares of Contran voting stock held in such trusts in the same manner as Ms. Simmons. Such voting rights of Ms. Simmons last through April 22, 2030 and are personal to Ms. Simmons. The remainder of Contran’s outstanding voting stock is held by another trust (the “Family Trust”), which was established for the benefit of Ms. Simmons and her late sister and their children and for which a third-party financial institution serves as trustee. Consequently, at March 31, 2021 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, 2020 that we filed with the Securities and Exchange Commission (“SEC”) on March 3, 2021 (the “2020 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, 2020 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, 2020) 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 period ended March 31, 2021 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 2020 Consolidated Financial Statements contained in our 2020 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 March 31, 2020, December 31, 2020 and March 31, 2021. The actual dates of our annual and quarterly periods are March 29, 2020, January 3, 2021 and April 4, 2021, 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

 

 

March 31,

 

 

2020

 

 

2021

 

 

(In thousands)

 

Net sales:

 

 

 

 

 

 

 

Security Products

$

25,469

 

 

$

25,885

 

Marine Components

 

6,842

 

 

 

10,039

 

Total net sales

$

32,311

 

 

$

35,924

 

 

 

 

 

 

 

 

 

Operating income (loss):

 

 

 

 

 

 

 

Security Products

$

5,713

 

 

$

5,490

 

Marine Components

 

1,082

 

 

 

1,943

 

Corporate operating expenses

 

(1,775

)

 

 

(1,616

)

Total operating income

 

5,020

 

 

 

5,817

 

Interest income

 

607

 

 

 

338

 

Income before income taxes

$

5,627

 

 

$

6,155

 

 

Intersegment sales are not material.

Note 3 – Accounts receivable, net:

 

 

December 31,

 

 

March 31,

 

 

2020

 

 

2021

 

 

(In thousands)

 

Accounts receivable, net:

 

 

 

 

 

 

 

Security Products

$

8,797

 

 

$

13,228

 

Marine Components

 

2,004

 

 

 

3,700

 

Allowance for doubtful accounts

 

(70

)

 

 

(70

)

Total accounts receivable, net

$

10,731

 

 

$

16,858

 

 

Note 4 – Inventories, net:

 

 

December 31,

 

 

March 31,

 

 

2020

 

 

2021

 

 

(In thousands)

 

Raw materials:

 

 

 

 

 

 

 

Security Products

$

2,318

 

 

$

2,744

 

Marine Components

 

902

 

 

 

906

 

Total raw materials

 

3,220

 

 

 

3,650

 

Work-in-process:

 

 

 

 

 

 

 

Security Products

 

9,214

 

 

 

9,066

 

Marine Components

 

2,454

 

 

 

2,438

 

Total work-in-process

 

11,668

 

 

 

11,504

 

Finished goods:

 

 

 

 

 

 

 

Security Products

 

2,235

 

 

 

2,086

 

Marine Components

 

1,214

 

 

 

913

 

Total finished goods

 

3,449

 

 

 

2,999

 

Total inventories, net

$

18,337

 

 

$

18,153

 

 

- 8 -


 

 

Note 5 – Accounts payable and accrued liabilities:

 

 

December 31,

 

 

March 31,

 

 

2020

 

 

2021

 

 

(In thousands)

 

Accounts payable:

 

 

 

 

 

 

 

Security Products

$

1,859

 

 

$

1,864

 

Marine Components

 

773

 

 

 

1,193

 

Accrued liabilities:

 

 

 

 

 

 

 

Employee benefits

 

8,431

 

 

 

4,748

 

Taxes other than on income

 

301

 

 

 

492

 

Customer tooling

 

393

 

 

 

365

 

Professional services

 

-

 

 

 

243

 

Other

 

441

 

 

 

592

 

Total accounts payable and accrued liabilities

$

12,198

 

 

$

9,497

 

 

Note 6 – Provision for income taxes:

 

 

Three months ended

 

 

March 31,

 

 

2020

 

 

2021

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

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

   income tax rate of 21%

$

1,182

 

 

$

1,293

 

State income taxes

 

197

 

 

 

200

 

FDII benefit

 

(28

)

 

 

(23

)

Other, net

 

5

 

 

 

 

Total income tax expense

$

1,356

 

 

$

1,470

 

 

Note 7 – Stockholders’ equity:

Our board of directors has previously authorized the repurchase of our Class A common stock in open market transactions, including block purchases, or in privately-negotiated transactions at unspecified prices and over an unspecified period of time. We may repurchase our common stock from time to time as market conditions permit. The stock repurchase program does not include specific price targets or timetables and may be suspended at any time. Depending on market conditions, we may terminate the program prior to its completion. We will use cash on hand to acquire the shares. Repurchased shares will be added to our treasury and cancelled.

 

During the first quarter of 2021, we purchased 50,000 shares of our Class A common stock in a market transaction for approximately $755,000. We cancelled these treasury shares and allocated their cost to common stock at par value and additional paid-in capital. At March 31, 2021 627,547 shares were available for purchase under prior repurchase authorizations.

 

Note 8 – Financial instruments:

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

 

 

December 31,

 

 

March 31,

 

 

2020

 

 

2021

 

 

Carrying

 

 

Fair

 

 

Carrying

 

 

Fair

 

 

amount

 

 

value

 

 

amount

 

 

value

 

 

(In thousands)

 

Cash and cash equivalents

$

70,637

 

 

$

70,637

 

 

$

64,747

 

 

$

64,747

 

Accounts receivable, net

 

10,731

 

 

 

10,731

 

 

 

16,858

 

 

 

16,858

 

Accounts payable

 

2,632

 

 

 

2,632

 

 

 

3,057

 

 

 

3,057

 

 

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

 

- 9 -


 

 

Note 9 – 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, 2022. Loans made to Valhi at any time under the agreement are at our discretion. At March 31, 2021, the outstanding principal balance receivable from Valhi under the promissory note was $29.2 million. Interest income (including unused commitment fees) on our loan to Valhi was $0.4 million and $0.3 million for the three months ended March 31, 2020 and 2021, respectively.

 

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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 electrical 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, trim tabs and related hardware and accessories for the recreational marine and other industries through our Marine Components segment.

General

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

 

Future demand for our products,

 

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

 

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

 

The impact of pricing and production decisions,

 

Customer and competitor strategies including substitute products,

 

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

 

Future litigation,

 

Our ability to protect or defend our intellectual property rights,

 

Potential difficulties in integrating future acquisitions,

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

- 11 -


 

Operating Income Overview

In the first quarter of 2021 operating income increased to $5.8 million compared to $5.0 million in the first quarter of 2020, before our sales volumes and operations had been significantly affected by the COVID-19 pandemic. The increase in operating income in the first quarter of 2021 compared to 2020 primarily resulted from higher Marine Components sales to the towboat market. We sustained the greatest negative operating impact from COVID-19 in the second quarter of 2020 to both of our business segments. Beginning in the third quarter of 2020 and continuing through the first quarter of 2021, Marine Components experienced a significant recovery in sales, while Security Products sales generally improved sequentially, though not to pre-pandemic levels.

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

 

 

March 31,

 

 

2020

 

 

%

 

 

2021

 

 

%

 

 

(Dollars in thousands)

 

Net sales

$

32,311

 

 

 

100.0

%

 

$

35,924

 

 

 

100.0

%

Cost of sales

 

21,880

 

 

 

67.7

 

 

 

24,889

 

 

 

69.3

 

Gross margin

 

10,431

 

 

 

32.3

 

 

 

11,035

 

 

 

30.7

 

Operating costs and expenses

 

5,411

 

 

 

16.8

 

 

 

5,218

 

 

 

14.5

 

Operating income

$

5,020

 

 

 

15.5

%

 

$

5,817

 

 

 

16.2

%

 

Net sales. Net sales increased $3.6 million in the first quarter of 2021 compared to the same period in 2020 primarily due to higher Marine Component sales and to a lesser extent higher Security Products sales. Relative changes in selling prices did not have a material impact on net sales comparisons.

Cost of sales and gross margin. Cost of sales as a percentage of sales increased 1.6% in the first quarter of 2021 compared to the same period in 2020. As a result, gross margin as a percentage of sales decreased over the same period. Gross margin percentage decreased in the first quarter of 2021 compared to the same period in 2020 due to the decline in the Security Products gross margin percentage partially offset by a slight increase in the Marine Components gross margin percentage. See segment discussion below.

Operating costs and expenses. Operating costs and expenses consist primarily of sales and administrative-related personnel costs, sales commissions and advertising expenses directly related to product sales and administrative costs relating to business unit and corporate management activities, as well as gains and losses on property and equipment. Operating costs and expenses for the first quarter of 2021 were lower than the same period in 2020 primarily due to lower employer paid medical costs as well as lower travel related expenses. Operating costs and expenses as a percentage of net sales decreased in 2021 due to lower costs and higher sales.

Operating income. As a percentage of net sales, operating income for the first quarter of 2021 increased compared to the same period of 2020 and was primarily impacted by the factors impacting cost of goods sold, gross margin and operating costs. See segment discussion below.

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

 

 

 

 

 

 

March 31,

 

 

 

 

 

 

2020

 

 

2021

 

 

%

Change

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Security Products:

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

25,469

 

 

$

25,885

 

 

 

2

%

Cost of sales

 

16,911

 

 

 

17,652

 

 

 

4

 

Gross margin

 

8,558

 

 

 

8,233

 

 

 

(4

)

Operating costs and expenses

 

2,845

 

 

 

2,743

 

 

 

(4

)

Operating income

$

5,713

 

 

$

5,490

 

 

 

(4

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

33.6

%

 

 

31.8

%

 

 

 

 

Operating income margin

 

22.4

 

 

 

21.2

 

 

 

 

 

 

Security Products. Security Products net sales increased 2% in the first quarter of 2021 compared to the same period last year. This increase in sales is primarily due to $0.7 million of higher sales to the transportation market and $0.5 million of higher sales to the government security market, partially offset by lower sales to markets that continue to be slower to recover from the effects of the COVID-19 pandemic, including $0.4 million of lower sales to distribution customers and $0.3 million of lower sales to the office furniture market. Gross margin and operating income margin for the first quarter of 2021 declined as compared to 2020 primarily due to higher cost inventory produced during the fourth quarter of 2020 and sold in the first quarter of 2021. Security Products inventory produced during the fourth quarter of 2020 had a higher carrying value compared to the same period in 2019 due to higher cost per unit of production as a result of lower production volumes during the fourth quarter of 2020. This negatively impacted our gross margin and operating income margin as this higher cost inventory was sold during the first quarter of 2021. Additionally, gross margin and operating income margin were favorably impacted by lower employer paid medical costs of $0.7 million during the first quarter of 2021 compared to 2020.

 

Three months ended

 

 

 

 

 

 

March 31,

 

 

 

 

 

 

2020

 

 

2021

 

 

%

Change

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marine Components:

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

6,842

 

 

$

10,039

 

 

 

47

%

Cost of sales

 

4,969

 

 

 

7,237

 

 

 

46

 

Gross margin

 

1,873

 

 

 

2,802

 

 

 

50

 

Operating costs and expenses

 

791

 

 

 

859

 

 

 

9

 

Operating income

$

1,082

 

 

$

1,943

 

 

 

80

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

27.4

%

 

 

27.9

%

 

 

 

 

Operating income margin

 

15.8

 

 

 

19.4

 

 

 

 

 

Marine Components. Marine Components net sales increased 47% in the first quarter of 2021 compared to the same period last year primarily due to increased sales of $2.7 million to the towboat market, primarily wake enhancements systems and surf pipes to original equipment boat manufacturers. Marine Components continues to benefit from an overall increase in demand in the recreational marine market which began in late spring 2020. Gross margin and operating income as a percentage of sales increased in the first quarter of 2021 compared to the same period last year due to a favorable customer and product mix and increased coverage of fixed costs on higher sales as well as decreased employer paid medical costs.

- 13 -


 

Outlook. We first began to feel the effects of the COVID-19 pandemic in late March 2020 when we began receiving requests from certain customers of both our Security Products and Marine Components segments to postpone shipments, in some cases because our customers’ production facilities were temporarily closed. The second quarter of 2020 sustained the greatest impact from COVID-19, but its effects continued to be felt through most of the remainder of the year. In the second half of 2020, our sales began to recover from the historically low levels we experienced during the second quarter of 2020, with sales steadily improving for the remainder of the year and through the first quarter of 2021. In the first quarter of 2021, our manufacturing operations maintained normal production rates in-line with improved demand, although our Security Products segment still has some markets which continue to be slower to recover, particularly distributors and office furniture. Our supply chains remain intact although we have been moderately impacted by recent global and domestic supply chain disruptions. Thus far our operations team has been able to manage through these disruptions with minimal impact on our operations. Most of the markets we serve continue to recover, and we communicate closely with all our customers to monitor order levels. Marine Component segment sales outpaced prior year as demand for recreational boats increased as people sought socially distanced, outdoor activities. We expect this trend to continue during the remainder of 2021.  

Considerable effort continues at all our locations to manage COVID-19 conditions including enhanced health and safety protocols and cleaning and disinfecting efforts. Throughout the course of the COVID-19 pandemic, we have focused our efforts on maintaining efficient operations while closely managing our expenses. The advance of the COVID-19 pandemic and the global efforts to mitigate its spread are expected to continue to challenge workers, businesses and governments during 2021. The success and timing of mitigating actions depends in part on continued deployment of effective tools to fight COVID-19, including effective treatments and vaccine distribution, before economies are likely to return to normal. In this regard, as part of our health and safety procedures, we are encouraging our employees to receive a COVID-19 vaccine and have offered paid time off to hourly employees to facilitate participation.

Based on current conditions, we expect to report increased revenue and operating income in 2021 compared to 2020, despite some markets of the Security Products Segment that have not fully recovered to pre-pandemic levels. As a result, we expect to continue to experience higher fixed costs per unit of production during 2021 which will continue to challenge gross margins in the segment. The impact of COVID-19 on 2021 will depend on customer demand for our products, including the timing and extent to which our customers’ operations may be impacted, on our customers’ perception as to consumer demand for their products and on any future disruptions in our operations or our suppliers’ operations, all of which are difficult to predict. As noted above, there are global supply chain disruptions and certain of our customers have experienced temporary pauses in their operations as a result of these disruptions. Thus far these pauses have not had a material negative effect on our sales. Our operations teams meet frequently to ensure we are taking appropriate actions to maintain a safe working environment for all our employees, minimize material or supply related operational disruptions, manage inventory levels and improve operating margins. We are constantly evaluating our staffing levels and we believe our current staffing levels are aligned with our sales and production forecasts.


- 14 -


 

 

Liquidity and Capital Resources

Consolidated cash flows

Operating activities. Trends in cash flows from operating activities, excluding changes in assets and liabilities, have generally been similar to the trends in operating earnings. Changes in assets and liabilities result primarily from the timing of production, sales and purchases. Changes in assets and liabilities generally tend to even out over time. However, period-to-period relative changes in assets and liabilities can significantly affect the comparability of cash flows from operating activities.

We generally report a net use of cash from operating activities in the first three months of each year due to seasonal changes in the level of our working capital. Our net cash used by operating activities for the first three months of 2021 increased by $2.2 million as compared to the first three months of 2020.  The increase in net cash used is primarily due to the net effects of:

 

A $0.8 million increase in operating income in 2021,

 

A $0.3 million decrease in interest received in 2021 due to lower average interest rates and to a lesser extent a lower average affiliate receivable balance,

 

A $0.4 million increase in cash paid for taxes in 2021 due to the relative timing of payments; and

 

A higher amount of net cash used by relative changes in our inventories, receivables, prepaids, payables and non-tax related accruals of approximately $2.2 million in 2021.

Relative changes in working capital can have a significant effect on cash flows from operating activities.  As shown below, the change in our average days sales outstanding from December 31, 2020 to March 31, 2021 varied by segment, primarily as a result of relative changes in the timing of collections but is consistent with prior year. For comparative purposes, we have provided December 31, 2019 and March 31, 2020 numbers below.

 

Days Sales Outstanding:

  

December 31, 2019

 

March 31, 2020

 

December 31, 2020

 

March 31, 2021

Security Products

  

38 Days

 

46 Days

 

35 Days

 

46 Days

Marine Components

  

27 Days

 

33 Days

 

24 Days

 

33 Days

Consolidated CompX

  

36 Days

 

43 Days

 

33 Days