SEC Filing Html Data

46200004620000617600061760009305000930500011160000111600000.370.370.500.500.750.750.900.901240300012403000123670001236700012423000124230001237400012374000DE0001049606--12-312022Q2false0001049606us-gaap:CommonClassAMemberus-gaap:CommonStockMember2022-04-012022-06-300001049606us-gaap:TreasuryStockMember2022-04-012022-06-300001049606us-gaap:CommonClassAMemberus-gaap:CommonStockMember2022-01-012022-06-300001049606us-gaap:TreasuryStockMember2022-01-012022-06-300001049606us-gaap:TreasuryStockMember2021-01-012021-06-300001049606us-gaap:CommonClassAMember2022-04-012022-06-300001049606cix:SharesRepurchasedInMarketTransactionMember2022-04-012022-06-300001049606us-gaap:CommonClassAMember2021-01-012021-03-310001049606us-gaap:CommonClassAMemberus-gaap:CommonStockMember2022-06-300001049606us-gaap:RetainedEarningsMember2022-06-300001049606us-gaap:AdditionalPaidInCapitalMember2022-06-300001049606us-gaap:CommonClassAMemberus-gaap:CommonStockMember2022-03-310001049606us-gaap:RetainedEarningsMember2022-03-310001049606us-gaap:AdditionalPaidInCapitalMember2022-03-3100010496062022-03-310001049606us-gaap:CommonClassAMemberus-gaap:CommonStockMember2021-12-310001049606us-gaap:RetainedEarningsMember2021-12-310001049606us-gaap:AdditionalPaidInCapitalMember2021-12-310001049606us-gaap:CommonClassAMemberus-gaap:CommonStockMember2021-06-300001049606us-gaap:RetainedEarningsMember2021-06-300001049606us-gaap:AdditionalPaidInCapitalMember2021-06-300001049606us-gaap:CommonClassAMemberus-gaap:CommonStockMember2021-03-310001049606us-gaap:RetainedEarningsMember2021-03-310001049606us-gaap:AdditionalPaidInCapitalMember2021-03-3100010496062021-03-310001049606us-gaap:CommonClassAMemberus-gaap:CommonStockMember2020-12-310001049606us-gaap:RetainedEarningsMember2020-12-310001049606us-gaap:AdditionalPaidInCapitalMember2020-12-310001049606us-gaap:OperatingSegmentsMembercix:SecurityProductsMember2022-04-012022-06-300001049606us-gaap:OperatingSegmentsMembercix:MarineComponentsMember2022-04-012022-06-300001049606us-gaap:CorporateNonSegmentMember2022-04-012022-06-300001049606us-gaap:OperatingSegmentsMembercix:SecurityProductsMember2022-01-012022-06-300001049606us-gaap:OperatingSegmentsMembercix:MarineComponentsMember2022-01-012022-06-300001049606us-gaap:CorporateNonSegmentMember2022-01-012022-06-300001049606us-gaap:OperatingSegmentsMembercix:SecurityProductsMember2021-04-012021-06-300001049606us-gaap:OperatingSegmentsMembercix:MarineComponentsMember2021-04-012021-06-300001049606us-gaap:CorporateNonSegmentMember2021-04-012021-06-300001049606us-gaap:OperatingSegmentsMembercix:SecurityProductsMember2021-01-012021-06-300001049606us-gaap:OperatingSegmentsMembercix:MarineComponentsMember2021-01-012021-06-300001049606us-gaap:CorporateNonSegmentMember2021-01-012021-06-300001049606cix:ValhiIncMembercix:NLIndustriesMember2022-06-300001049606cix:NLIndustriesMembercix:CompXInternationalIncMember2022-06-300001049606cix:ContranCorporationMembercix:ValhiIncMember2022-06-300001049606us-gaap:UnsecuredDebtMembercix:ValhiIncMember2022-01-012022-06-300001049606us-gaap:UnsecuredDebtMembercix:ValhiIncMember2021-01-012021-06-300001049606us-gaap:UnsecuredDebtMembercix:ValhiIncMember2022-06-300001049606us-gaap:RetainedEarningsMember2022-04-012022-06-300001049606us-gaap:RetainedEarningsMember2022-01-012022-06-300001049606us-gaap:RetainedEarningsMember2021-04-012021-06-300001049606us-gaap:RetainedEarningsMember2021-01-012021-06-300001049606us-gaap:CommonClassAMember2022-06-300001049606us-gaap:CommonClassAMember2021-12-3100010496062021-06-3000010496062020-12-310001049606us-gaap:EstimateOfFairValueFairValueDisclosureMember2022-06-300001049606us-gaap:CarryingReportedAmountFairValueDisclosureMember2022-06-300001049606us-gaap:EstimateOfFairValueFairValueDisclosureMember2021-12-310001049606us-gaap:CarryingReportedAmountFairValueDisclosureMember2021-12-310001049606cix:SecurityProductsMember2022-06-300001049606cix:MarineComponentsMember2022-06-300001049606cix:SecurityProductsMember2021-12-310001049606cix:MarineComponentsMember2021-12-3100010496062022-07-280001049606cix:SharesRepurchasedFromAffiliatesMember2022-04-012022-06-300001049606us-gaap:UnsecuredDebtMembercix:ValhiIncMember2016-08-012016-08-310001049606us-gaap:UnsecuredDebtMembercix:ValhiIncMember2016-08-310001049606us-gaap:AdditionalPaidInCapitalMember2022-04-012022-06-3000010496062022-04-012022-06-300001049606us-gaap:AdditionalPaidInCapitalMember2022-01-012022-06-3000010496062022-01-012022-06-300001049606us-gaap:AdditionalPaidInCapitalMember2021-04-012021-06-3000010496062021-04-012021-06-300001049606us-gaap:AdditionalPaidInCapitalMember2021-01-012021-06-3000010496062021-01-012021-06-3000010496062022-06-3000010496062021-12-31iso4217:USDcix:itemcix:Transactionxbrli:sharesiso4217:USDxbrli:sharesxbrli:pure

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, 2022

OR

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

Dallas, Texas 75240-2620

(Address of principal executive offices)

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 28, 2022, the registrant had 12,307,157 shares of Class A common stock, $.01 par value per share, outstanding.

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 -

Condensed Consolidated Statements of Income (unaudited) – Three and six months ended June 30, 2021 and 2022

- 4 -

Condensed Consolidated Statements of Stockholders’ Equity (unaudited) – Three and six months ended June 30, 2021 and 2022

- 5 -

Condensed Consolidated Statements of Cash Flows (unaudited) – Six months ended June 30, 2021 and 2022

- 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

- 17 -

Item 4.

Controls and Procedures

- 17 -

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, 

June 30, 

ASSETS

2021

2022

(unaudited)

Current assets:

 

  

  

Cash and cash equivalents

$

76,579

$

70,057

Accounts receivable, net

 

15,546

 

17,573

Inventories, net

 

25,642

 

33,303

Prepaid expenses and other

 

2,464

 

3,779

Total current assets

 

120,231

 

124,712

Other assets:

 

  

 

  

Note receivable from affiliate

 

18,700

 

16,600

Goodwill

 

23,742

 

23,742

Other noncurrent

 

597

 

590

Total other assets

 

43,039

 

40,932

Property and equipment:

 

  

 

  

Land

 

5,071

 

5,071

Buildings

 

23,161

 

23,174

Equipment

 

70,664

 

72,754

Construction in progress

 

2,028

 

1,389

 

100,924

 

102,388

Less accumulated depreciation

 

71,742

 

72,929

Net property and equipment

 

29,182

 

29,459

Total assets

$

192,452

$

195,103

LIABILITIES AND STOCKHOLDERS' EQUITY

    

Current liabilities:

 

  

Accounts payable and accrued liabilities

$

14,724

$

15,183

Income taxes payable to affiliate

 

1,722

 

1,055

Total current liabilities

 

16,446

 

16,238

Noncurrent liabilities - deferred income taxes

 

2,918

 

2,432

Stockholders' equity:

 

  

 

  

Preferred stock

 

 

Class A common stock

 

124

 

123

Additional paid-in capital

 

54,780

 

53,155

Retained earnings

 

118,184

 

123,155

Total stockholders' equity

 

173,088

 

176,433

Total liabilities and stockholders’ equity

$

192,452

$

195,103

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

$

36,253

$

41,675

$

72,177

$

83,725

Cost of sales

 

24,947

 

28,046

 

49,836

 

58,016

Gross margin

 

11,306

 

13,629

 

22,341

 

25,709

Selling, general and administrative expense

 

5,548

 

5,884

 

10,766

 

11,658

Operating income

 

5,758

 

7,745

 

11,575

 

14,051

Interest income

 

318

 

337

 

656

 

551

Income before income taxes

 

6,076

 

8,082

 

12,231

 

14,602

Provision for income taxes

 

1,456

 

1,906

 

2,926

 

3,442

Net income

$

4,620

$

6,176

$

9,305

$

11,160

Basic and diluted net income per common share

$

.37

$

.50

$

.75

$

.90

Basic and diluted weighted average shares outstanding

 

12,403

 

12,367

 

12,423

 

12,374

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

$

124

$

55,232

$

113,740

$

$

169,096

Net income

 

 

 

4,620

 

 

4,620

Issuance of common stock

104

104

Cash dividends ($.20 per share)

 

 

 

(2,481)

 

 

(2,481)

Balance at June 30, 2021

$

124

$

55,336

$

115,879

$

$

171,339

Balance at March 31, 2022

$

124

$

54,780

$

120,073

$

$

174,977

Net income

 

 

 

6,176

 

 

6,176

Issuance of common stock

118

118

Treasury stock:

Acquired

(1,744)

(1,744)

Retired

(1)

(1,743)

1,744

Cash dividends ($.25 per share)

 

 

 

(3,094)

 

 

(3,094)

Balance at June 30, 2022

$

123

$

53,155

$

123,155

$

$

176,433

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

$

124

$

55,987

$

111,545

$

$

167,656

Net income

 

 

 

9,305

 

 

9,305

Issuance of common stock

104

104

Treasury stock:

Acquired

(755)

(755)

Retired

(755)

755

Cash dividends ($.40 per share)

 

 

 

(4,971)

 

 

(4,971)

Balance at June 30, 2021

$

124

$

55,336

$

115,879

$

$

171,339

Balance at December 31, 2021

$

124

$

54,780

$

118,184

$

$

173,088

Net income

 

 

 

11,160

 

 

11,160

Issuance of common stock

118

118

Treasury stock:

Acquired

(1,744)

(1,744)

Retired

(1)

(1,743)

1,744

Cash dividends ($.50 per share)

 

 

 

(6,189)

 

 

(6,189)

Balance at June 30, 2022

$

123

$

53,155

$

123,155

$

$

176,433

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:

 

  

 

  

Net income

$

9,305

$

11,160

Depreciation and amortization

 

1,900

 

1,956

Deferred income taxes

 

467

 

(486)

Other, net

 

185

 

201

Change in assets and liabilities:

 

  

 

  

Accounts receivable, net

 

(5,910)

 

(2,033)

Inventories, net

 

(1,691)

 

(7,735)

Accounts payable and accrued liabilities

 

(393)

 

446

Accounts with affiliates

 

112

 

(667)

Prepaids and other, net

 

(414)

 

(1,316)

Net cash provided by operating activities

 

3,561

 

1,526

Cash flows from investing activities:

 

  

 

  

Capital expenditures

 

(1,598)

 

(2,215)

Note receivable from affiliate:

 

  

 

  

Collections

 

22,200

 

12,400

Advances

 

(18,700)

 

(10,300)

Net cash provided by (used in) investing activities

 

1,902

 

(115)

Cash flows from financing activities:

Dividends paid

 

(4,971)

 

(6,189)

Treasury stock acquired

 

(755)

 

(1,744)

Net cash used in financing activities

 

(5,726)

 

(7,933)

Cash and cash equivalents - net change from:

Operating, investing and financing activities

(263)

(6,522)

Balance at beginning of period

 

70,637

 

76,579

Balance at end of period

$

70,374

$

70,057

Supplemental disclosures -

Cash paid for income taxes

$

2,439

$

4,603

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 87% owned by NL Industries, Inc. (NYSE: NL) at June 30, 2022. At June 30, 2022, 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 June 30, 2022 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, 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:

 

  

 

  

  

 

  

Security Products

$

27,587

$

28,837

$

53,472

$

58,418

Marine Components

 

8,666

 

12,838

 

18,705

 

25,307

Total net sales

$

36,253

$

41,675

$

72,177

$

83,725

Operating income (loss):

 

  

 

  

 

  

 

  

Security Products

$

5,845

$

6,731

$

11,335

$

12,741

Marine Components

 

1,598

 

2,724

 

3,541

 

4,733

Corporate operating expenses

 

(1,685)

 

(1,710)

 

(3,301)

 

(3,423)

Total operating income

 

5,758

 

7,745

 

11,575

 

14,051

Interest income

 

318

 

337

 

656

 

551

Income before income taxes

$

6,076

$

8,082

$

12,231

$

14,602

Intersegment sales are not material.

Note 3 – Accounts receivable, net:

December 31, 

June 30, 

    

2021

    

2022

(In thousands)

Accounts receivable, net:

 

  

 

  

Security Products

$

12,896

$

13,735

Marine Components

 

2,720

 

3,908

Allowance for doubtful accounts

 

(70)

 

(70)

Total accounts receivable, net

$

15,546

$

17,573

Note 4 – Inventories, net:

December 31, 

June 30, 

    

2021

    

2022

(In thousands)

Raw materials:

 

  

 

  

Security Products

$

3,640

$

4,691

Marine Components

 

1,402

 

2,558

Total raw materials

 

5,042

 

7,249

Work-in-process:

 

  

 

  

Security Products

 

12,721

 

15,017

Marine Components

 

4,046

 

5,941

Total work-in-process

 

16,767

 

20,958

Finished goods:

 

  

 

  

Security Products

 

2,271

 

3,111

Marine Components

 

1,562

 

1,985

Total finished goods

 

3,833

 

5,096

Total inventories, net

$

25,642

$

33,303

- 8 -

Note 5 – Accounts payable and accrued liabilities:

December 31, 

June 30, 

    

2021

    

2022

(In thousands)

Accounts payable:

 

  

 

  

Security Products

$

2,594

$

4,484

Marine Components

 

814

 

1,936

Accrued liabilities:

 

  

 

  

Employee benefits

 

9,797

 

7,165

Customer tooling

 

516

 

617

Taxes other than on income

 

391

 

418

Insurance

 

208

 

191

Other

 

404

 

372

Total accounts payable and accrued liabilities

$

14,724

$

15,183

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
  income tax rate of 21%

$

1,276

$

1,697

$

2,569

$

3,066

State income taxes

 

200

 

243

 

400

 

439

FDII benefit

 

(17)

 

(39)

 

(40)

 

(72)

Other, net

 

(3)

 

5

 

(3)

 

9

Total provision for income taxes

$

1,456

$

1,906

$

2,926

$

3,442

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 78,900 shares of our Class A common stock for an aggregate amount of approximately $1.7 million under the prior repurchase authorizations.  Of these shares, 70,000 shares were purchased in a market transaction, and 8,900 shares were purchased from two of our affiliates in two separate private transactions that were also approved in advance by our independent directors. During the first quarter of 2021, we purchased 50,000 shares of our Class A common stock in a market transaction for approximately $.8 million. We cancelled these treasury shares and allocated their cost to common stock at par value and additional paid-in capital. At June 30, 2022, 523,647 shares were available for purchase under prior repurchase authorizations.

- 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

$

76,579

$

76,579

$

70,057

$

70,057

Accounts receivable, net

 

15,546

 

15,546

 

17,573

 

17,573

Accounts payable

 

3,408

 

3,408

 

6,420

 

6,420

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 $30 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, 2023. Loans made to Valhi at any time under the agreement are at our discretion. At June 30, 2022, the outstanding principal balance receivable from Valhi under the promissory note was $16.6 million. Interest income (including unused commitment fees) on our loan to Valhi was $.6 million and $.4 million for the six months ended June 30, 2021 and 2022, respectively.

- 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

 

  

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

- 13 -

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.

Three months ended

Six months ended

    

 

June 30, 

%  

June 30, 

%  

 

    

2021

    

2022

    

Change

    

2021

    

2022

    

Change

 

(Dollars in thousands)

(Dollars in thousands)

 

Marine Components:

 

  

 

  

 

  

 

  

 

  

 

  

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

%  

  

Operating income margin

 

18.4

 

21.2

 

 

18.9

 

18.7

 

  

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

- 14 -

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.