UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended
OR
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number
(Exact name of Registrant as specified in its charter)
| ||
(State or other jurisdiction of | (IRS Employer |
(Address of principal executive offices)
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading Symbol(s) |
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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.
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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 | ☐ |
☒ | 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
As of July 28, 2022, the registrant had
COMPX INTERNATIONAL INC.
Index
| Page | ||
Part I. | FINANCIAL INFORMATION | ||
Item 1. | Financial Statements | ||
Condensed Consolidated Balance Sheets – December 31, 2021 and June 30, 2022 (unaudited) | - 3 - | ||
- 4 - | |||
- 5 - | |||
- 6 - | |||
Notes to Condensed Consolidated Financial Statements (unaudited) | - 7 - | ||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | - 11 - | ||
- 17 - | |||
- 17 - | |||
- 18 - | |||
- 18 - | |||
- 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, | June 30, | |||||
ASSETS | 2021 | 2022 | ||||
(unaudited) | ||||||
Current assets: |
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Cash and cash equivalents | $ | | $ | | ||
Accounts receivable, net |
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Inventories, net |
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Prepaid expenses and other |
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Total current assets |
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Other assets: |
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Note receivable from affiliate |
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Goodwill |
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Other noncurrent |
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Total other assets |
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Property and equipment: |
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Land |
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Buildings |
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Equipment |
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Construction in progress |
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Less accumulated depreciation |
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Net property and equipment |
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Total assets | $ | | $ | | ||
LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current liabilities: |
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Accounts payable and accrued liabilities | $ | | $ | | ||
Income taxes payable to affiliate |
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Total current liabilities |
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Noncurrent liabilities - deferred income taxes |
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Stockholders' equity: |
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Preferred stock |
| — |
| — | ||
Class A common stock |
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Additional paid-in capital |
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Retained earnings |
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Total stockholders' equity |
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Total liabilities and stockholders’ equity | $ | | $ | |
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, | |||||||||||
| 2021 |
| 2022 |
| 2021 |
| 2022 | |||||
(unaudited) | ||||||||||||
Net sales | $ | | $ | | $ | | $ | | ||||
Cost of sales |
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Gross margin |
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Selling, general and administrative expense |
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Operating income |
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Interest income |
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Income before income taxes |
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Provision for income taxes |
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Net income | | | | | ||||||||
Basic and diluted net income per common share | | | | | ||||||||
Basic and diluted weighted average shares outstanding |
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See accompanying Notes to Condensed Consolidated Financial Statements.
- 4 -
COMPX INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
Three months ended June 30, 2021 and 2022 (unaudited) | |||||||||||||||
Class A | Additional | Total | |||||||||||||
common | paid-in | Retained | Treasury | stockholders' | |||||||||||
| stock |
| capital |
| earnings |
| stock |
| equity | ||||||
Balance at March 31, 2021 | $ | | $ | | $ | | $ | — | $ | | |||||
Net income |
| — |
| — |
| |
| — |
| | |||||
Issuance of common stock | — | | — | — | | ||||||||||
Cash dividends ($ |
| — |
| — |
| ( |
| — |
| ( | |||||
Balance at June 30, 2021 | $ | | $ | | $ | | $ | — | $ | | |||||
Balance at March 31, 2022 | $ | | $ | | $ | | $ | — | $ | | |||||
Net income |
| — |
| — |
| |
| — |
| | |||||
Issuance of common stock | — | | — | — | | ||||||||||
Treasury stock: | |||||||||||||||
Acquired | — | — | — | ( | ( | ||||||||||
Retired | ( | ( | — | | — | ||||||||||
Cash dividends ($ |
| — |
| — |
| ( |
| — |
| ( | |||||
Balance at June 30, 2022 | $ | | $ | | $ | | $ | — | $ | |
Six months ended June 30, 2021 and 2022 (unaudited) | |||||||||||||||
Class A | Additional |
| Total | ||||||||||||
common | paid-in | Retained | Treasury | stockholders' | |||||||||||
| stock |
| capital |
| earnings |
| stock |
| equity | ||||||
Balance at December 31, 2020 | $ | | $ | | $ | | $ | — | $ | | |||||
Net income |
| — |
| — |
| |
| — |
| | |||||
Issuance of common stock | — | | — | — | | ||||||||||
Treasury stock: | |||||||||||||||
Acquired | — | — | — | ( | ( | ||||||||||
Retired | — | ( | — | | — | ||||||||||
Cash dividends ($ |
| — |
| — |
| ( |
| — |
| ( | |||||
Balance at June 30, 2021 | $ | | $ | | $ | | $ | — | $ | | |||||
Balance at December 31, 2021 | $ | | $ | | $ | | $ | — | $ | | |||||
Net income |
| — |
| — |
| |
| — |
| | |||||
Issuance of common stock | — | | — | — | | ||||||||||
Treasury stock: | |||||||||||||||
Acquired | — | — | — | ( | ( | ||||||||||
Retired | ( | ( | — | | — | ||||||||||
Cash dividends ($ |
| — |
| — |
| ( |
| — |
| ( | |||||
Balance at June 30, 2022 | $ | | $ | | $ | | $ | — | $ | |
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, | ||||||
| 2021 |
| 2022 | |||
(unaudited) | ||||||
Cash flows from operating activities: |
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Net income | $ | | $ | | ||
Depreciation and amortization |
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Deferred income taxes |
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| ( | ||
Other, net |
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Change in assets and liabilities: |
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Accounts receivable, net |
| ( |
| ( | ||
Inventories, net |
| ( |
| ( | ||
Accounts payable and accrued liabilities |
| ( |
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Accounts with affiliates |
| |
| ( | ||
Prepaids and other, net |
| ( |
| ( | ||
Net cash provided by operating activities |
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Cash flows from investing activities: |
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Capital expenditures |
| ( |
| ( | ||
Note receivable from affiliate: |
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Collections |
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Advances |
| ( |
| ( | ||
Net cash provided by (used in) investing activities |
| |
| ( | ||
Cash flows from financing activities: | ||||||
Dividends paid |
| ( |
| ( | ||
Treasury stock acquired |
| ( |
| ( | ||
Net cash used in financing activities |
| ( |
| ( | ||
Cash and cash equivalents - net change from: | ||||||
Operating, investing and financing activities | ( | ( | ||||
Balance at beginning of period |
| |
| | ||
Balance at end of period | $ | | $ | | ||
Supplemental disclosures - | ||||||
Cash paid for income taxes | $ | | $ | |
See accompanying Notes to Condensed Consolidated Financial Statements.
- 6 -
COMPX INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022
(unaudited)
Note 1 – Organization and basis of presentation:
Organization. We (NYSE American: CIX) were approximately
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, 2021 that we filed with the Securities and Exchange Commission (“SEC”) on March 2, 2022 (the “2021 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, 2021 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, 2021) 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, 2022 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 2021 Consolidated Financial Statements contained in our 2021 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, 2021 December 31, 2021 and June 30, 2022. The actual dates of our annual and quarterly periods are July 4, 2021, January 2, 2022 and July 3, 2022, respectively. Unless otherwise indicated, references in this report to “we”, “us” or “our” refer to CompX International Inc. and its subsidiaries, taken as a whole.
- 7 -
Note 2 – Business segment information:
Three months ended | Six months ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2021 |
| 2022 |
| 2021 |
| 2022 | |||||
(In thousands) | ||||||||||||
Net sales: |
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| |||||
Security Products | $ | | $ | | $ | | $ | | ||||
Marine Components |
| |
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| |
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Total net sales | $ | | $ | | $ | | $ | | ||||
Operating income (loss): |
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Security Products | $ | | $ | | $ | | $ | | ||||
Marine Components |
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Corporate operating expenses |
| ( |
| ( |
| ( |
| ( | ||||
Total operating income |
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Interest income |
| |
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Income before income taxes | $ | | $ | | $ | | $ | |
Intersegment sales are not material.
Note 3 – Accounts receivable, net:
December 31, | June 30, | |||||
| 2021 |
| 2022 | |||
(In thousands) | ||||||
Accounts receivable, net: |
|
|
|
| ||
Security Products | $ | | $ | | ||
Marine Components |
| |
| | ||
Allowance for doubtful accounts |
| ( |
| ( | ||
Total accounts receivable, net | $ | | $ | |
Note 4 – Inventories, net:
December 31, | June 30, | |||||
| 2021 |
| 2022 | |||
(In thousands) | ||||||
Raw materials: |
|
|
|
| ||
Security Products | $ | | $ | | ||
Marine Components |
| |
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Total raw materials |
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Work-in-process: |
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Security Products |
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Marine Components |
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Total work-in-process |
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Finished goods: |
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Security Products |
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Marine Components |
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Total finished goods |
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Total inventories, net | $ | | $ | |
- 8 -
Note 5 – Accounts payable and accrued liabilities:
December 31, | June 30, | |||||
| 2021 |
| 2022 | |||
(In thousands) | ||||||
Accounts payable: |
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Security Products | $ | | $ | | ||
Marine Components |
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Accrued liabilities: |
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Employee benefits |
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Customer tooling |
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Taxes other than on income |
| |
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Insurance |
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Other |
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Total accounts payable and accrued liabilities | $ | | $ | |
Note 6 – Provision for income taxes:
Three months ended | Six months ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2021 |
| 2022 |
| 2021 |
| 2022 | |||||
(In thousands) | ||||||||||||
Expected tax expense, at the U.S. federal statutory | $ | | $ | | $ | | $ | | ||||
State income taxes |
| |
| |
| |
| | ||||
FDII benefit |
| ( |
| ( |
| ( |
| ( | ||||
Other, net |
| ( |
| |
| ( |
| | ||||
Total provision for income taxes | $ | | $ | | $ | | $ | |
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 use cash on hand to acquire the shares. Repurchased shares are added to our treasury and cancelled.
During the second quarter of 2022, we acquired
- 9 -
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, 2021 | June 30, 2022 | |||||||||||
Carrying | Fair | Carrying | Fair | |||||||||
| amount |
| value |
| amount |
| value | |||||
(In thousands) | ||||||||||||
Cash and cash equivalents | $ | | $ | | $ | | $ | | ||||
Accounts receivable, net |
| |
| |
| |
| | ||||
Accounts payable |
| |
| |
| |
| |
Due to their near-term maturities, the carrying amounts of accounts receivable and accounts payable are considered equivalent to fair value.
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 under which, as amended, we agreed to loan Valhi up to $
- 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 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 |
- 11 -
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.
Operating Income Overview
In the second quarter of 2022 operating income increased to $7.7 million compared to $5.8 million in the second quarter of 2021. Operating income for the first six months of 2022 was $14.0 million compared to $11.6 million in the first six months of 2021. The increase in operating income in the second quarter and first six months of 2022 compared to 2021 is primarily due to higher sales for both the Marine Components and Security Products segments.
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 |
| |||||||||
June 30, |
| ||||||||||
2021 | % | 2022 | % | ||||||||
(Dollars in thousands) |
| ||||||||||
Net sales | $ | 36,253 |
| 100.0 | % | $ | 41,675 |
| 100.0 | % | |
Cost of sales |
| 24,947 |
| 68.8 |
| 28,046 |
| 67.3 | |||
Gross margin |
| 11,306 |
| 31.2 |
| 13,629 |
| 32.7 | |||
Operating costs and expenses |
| 5,548 |
| 15.3 |
| 5,884 |
| 14.1 | |||
Operating income | $ | 5,758 |
| 15.9 | % | $ | 7,745 |
| 18.6 | % |
Six months ended |
| ||||||||||
June 30, |
| ||||||||||
| 2021 |
| % |
| 2022 |
| % | ||||
(Dollars in thousands) |
| ||||||||||
Net sales | $ | 72,177 |
| 100.0 | % | $ | 83,725 |
| 100.0 | % | |
Cost of sales |
| 49,836 |
| 69.0 |
| 58,016 |
| 69.3 | |||
Gross margin |
| 22,341 |
| 31.0 |
| 25,709 |
| 30.7 | |||
Operating costs and expenses |
| 10,766 |
| 15.0 |
| 11,658 |
| 13.9 | |||
Operating income | $ | 11,575 |
| 16.0 | % | $ | 14,051 |
| 16.8 | % |
- 12 -
Net sales. Net sales increased $5.4 million and $11.5 million in the second quarter and for the first six months of 2022, respectively, compared to the same periods in 2021 due to higher Marine Components sales primarily to the towboat market and, to a lesser extent, higher Security Products sales across a variety of markets.
Cost of sales and gross margin. Cost of sales as a percentage of sales decreased 1.5% in the second quarter of 2022 compared to the same period in 2021. As a result, gross margin as a percentage of sales increased over the same period. Gross margin percentage increased in the second quarter of 2022 compared to the same period in 2021 primarily due to improved gross margin at Security Products. Cost of sales and gross margin as a percentage of sales for the first six months of 2022 were comparable to the same period in 2021. 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 any gains and losses on property and equipment. Operating costs and expenses for the second quarter of 2022 are comparable to the same period in 2021. For the first six months of 2022, operating costs and expenses were higher than the same period in 2021 primarily due to higher salary and benefit costs which increased by $.4 million. Operating costs and expenses as a percentage of net sales decreased for the second quarter and the first six months of 2022 due to the effect of higher sales.
Operating income. As a percentage of net sales, operating income for the second quarter and first six months of 2022 increased compared to the same periods of 2021 and was primarily impacted by the factors impacting cost of sales, 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.
Segment Results
The key performance indicator for our segments is operating income.
Three months ended |
| Six months ended |
|
| |||||||||||||
June 30, | % | June 30, | % |
| |||||||||||||
| 2021 |
| 2022 |
| Change |
| 2021 |
| 2022 |
| Change |
| |||||
(Dollars in thousands) | (Dollars in thousands) |
| |||||||||||||||
Security Products: |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net sales | $ | 27,587 | $ | 28,837 |
| 5 | % | $ | 53,472 | $ | 58,418 |
| 9 | % | |||
Cost of sales |
| 18,738 |
| 18,888 |
| 1 |
| 36,390 |
| 39,388 |
| 8 | |||||
Gross margin |
| 8,849 |
| 9,949 |
| 12 |
| 17,082 |
| 19,030 |
| 11 | |||||
Operating costs and expenses |
| 3,004 |
| 3,218 |
| 7 |
| 5,747 |
| 6,289 |
| 9 | |||||
Operating income | $ | 5,845 | $ | 6,731 |
| 15 | $ | 11,335 | $ | 12,741 |
| 12 | |||||
Gross margin |
| 32.1 | % |
| 34.5 | % |
| 31.9 | % |
| 32.6 | % |
| ||||
Operating income margin |
| 21.2 |
| 23.3 |
|
| 21.2 |
| 21.8 |
|
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Security Products. Security Products net sales increased 5% in the second quarter of 2022 compared to the same period last year. Relative to prior year, second quarter sales were $.7 million higher to the office furniture market and $.6 million higher to the government security market. Security Products net sales increased 9% in the first six months of 2022 compared to the same period last year. Relative to prior year, sales for the first six months were $1.9 million higher to the government security market, $1.4 million higher to the office furniture market and $.8 million higher to distributors.
Gross margin as a percentage of net sales for the second quarter and the first six months of 2022 increased as compared to the same periods in 2021 primarily due to higher sales resulting from price increases and surcharges
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implemented to recover higher production costs and, to a lesser extent, from increased coverage of fixed costs from higher sales. Operating income as a percentage of net sales increased in the second quarter and the first six months of 2022 compared to the same periods in 2021 due to the factors impacting gross margin, as well as increased coverage of operating costs and expenses from higher sales.
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Marine Components: |
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Net sales | $ | 8,666 | $ | 12,838 |
| 48 | % | $ | 18,705 | $ | 25,307 |
| 35 | % | |||
Cost of sales |
| 6,209 |
| 9,158 |
| 47 |
| 13,446 |
| 18,628 |
| 39 | |||||
Gross margin |
| 2,457 |
| 3,680 |
| 50 |
| 5,259 |
| 6,679 |
| 27 | |||||
Operating costs and expenses |
| 859 |
| 956 |
| 11 |
| 1,718 |
| 1,946 |
| 13 | |||||
Operating income | $ | 1,598 | $ | 2,724 |
| 70 | $ | 3,541 | $ | 4,733 |
| 34 | |||||
Gross margin |
| 28.4 | % |
| 28.7 | % |
| 28.1 | % |
| 26.4 | % |
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Operating income margin |
| 18.4 |
| 21.2 |
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| 18.9 |
| 18.7 |
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Marine Components. Marine Components net sales in the second quarter and first six months of 2022 increased 48% and 35%, respectively, compared to the same periods in 2021. Sales to the towboat market were $3.7 million higher for the second quarter and $5.7 million higher for the first six months of 2022 compared to the same periods in 2021.
As a percentage of net sales, gross margin for the second quarter of 2022 was comparable to the same period in 2021. Operating income as a percentage of net sales increased in the second quarter of 2022 compared to the same period in 2021 due to increased sales as a result of surcharges implemented to recover higher production costs and increased coverage of cost of sales, operating costs and expenses on higher sales. For the first six months of 2022, gross margin as a percentage of net sales decreased compared to the same period in 2021 as surcharges and increased coverage of fixed costs from higher sales were more than offset by higher cost of sales, most significantly in the first quarter of 2022, driven by higher raw material costs (primarily stainless steel and aluminum), higher shipping costs and increased labor costs. Operating income as a percentage of net sales for the six months of 2022 was comparable to the same period in 2021.
Outlook. During the first six months of 2022, we have experienced strong demand at both our segments. We operated our manufacturing facilities at elevated production rates during the first half of the year in line with our demand. While labor markets continue to be competitive in each of the regions in which we operate and labor costs continue to rise, during the second quarter we were able to achieve more balanced staffing levels aligned with current and forecasted demand, particularly at our Marine Components segment.
Security Products is beginning to experience some softening in demand particularly in the transportation and distribution markets, but we expect continued strong demand in other markets to offset these declines. Marine Components demand remains strong and we currently expect to report increased net sales and operating income from both segments for the full year 2022 compared to 2021. Certain of our supply chains, particularly for commodity raw materials, have stabilized while other supply chains remain challenging, and current global and domestic supply chain disruptions continue to impact sourcing certain raw materials and components (such as electronic components) due to increased lead times, shortages and transportation and logistics delays. Thus far we have been able to manage through these disruptions with minimal impact on our operations. In addition, we are experiencing increased production costs including higher labor and shipping costs and, although prices for certain raw materials have begun to stabilize, costs of many of the raw materials we use including zinc, brass, stainless steel and aluminum remain elevated above pre-pandemic levels. In response, we have implemented additional price increases and increased surcharges where necessary and, to-date, we have been successful in recovering our increased production costs; however, the extent to which future price increases and surcharges will mitigate rising costs is uncertain and we expect increasing production costs will continue to pressure gross margins as inventory costs are expected to remain above prior year costs for the foreseeable future. We continue to take actions we
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believe will minimize supply related disruptions, manage inventory turnover, improve operating margins and maintain a safe working conditions environment for our employees.
Our expectations for our operations and the markets we serve are based on a number of factors outside our control. As noted above, there continue to be global and domestic supply chain challenges and any future impacts on our operations will depend on, among other things, any future disruption in our operations or our suppliers’ operations, demand for our products and the timing and effectiveness of the global measures deployed to fight COVID-19, particularly in China, all of which remain uncertain and cannot be predicted.
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.
Our net cash provided by operating activities for the first six months of 2022 decreased by $2.0 million as compared to the first six months of 2021. The decrease is primarily due to the net effects of:
● | A $2.5 million increase in operating income in 2022, |
● | A $2.2 million increase in cash paid for taxes in 2022 due to higher operating income and 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 2022. |
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, 2021 to June 30, 2022 varied by segment primarily as a result of relative changes in the timing of collections relative to sales at the end of the quarter. For comparative purposes, we have provided December 31, 2020 and June 30, 2021 numbers below.