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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 September 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 October 27, 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 September 30, 2022 (unaudited)

- 3 -

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

- 4 -

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

- 5 -

Condensed Consolidated Statements of Cash Flows (unaudited) – Nine months ended September  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 6.

Exhibits

- 18 -

Items 2, 3, 4 and 5 of Part II are omitted because there is no information to report.

- 2 -

COMPX INTERNATIONAL INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

December 31, 

September 30, 

ASSETS

2021

2022

(unaudited)

Current assets:

 

  

  

Cash and cash equivalents

$

76,579

$

53,277

Accounts receivable, net

 

15,546

 

19,167

Inventories, net

 

25,642

 

33,337

Prepaid expenses and other

 

2,464

 

2,646

Total current assets

 

120,231

 

108,427

Other assets:

 

  

 

  

Note receivable from affiliate

 

18,700

 

14,700

Goodwill

 

23,742

 

23,742

Other noncurrent assets

 

597

 

590

Total other assets

 

43,039

 

39,032

Property and equipment:

 

  

 

  

Land

 

5,071

 

5,071

Buildings

 

23,161

 

23,181

Equipment

 

70,664

 

73,738

Construction in progress

 

2,028

 

834

 

100,924

 

102,824

Less accumulated depreciation

 

71,742

 

73,763

Net property and equipment

 

29,182

 

29,061

Total assets

$

192,452

$

176,520

LIABILITIES AND STOCKHOLDERS' EQUITY

    

Current liabilities:

 

  

Accounts payable and accrued liabilities

$

14,724

$

16,139

Income taxes payable to affiliate

 

1,722

 

1,375

Total current liabilities

 

16,446

 

17,514

Noncurrent liabilities:

 

 

Deferred income taxes

2,918

2,176

Other

61

Total noncurrent liabilities

2,918

2,237

Stockholders' equity:

 

  

 

  

Preferred stock

 

 

Class A common stock

 

124

 

123

Additional paid-in capital

 

54,780

 

53,155

Retained earnings

 

118,184

 

103,491

Total stockholders' equity

 

173,088

 

156,769

Total liabilities and stockholders’ equity

$

192,452

$

176,520

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

Nine months ended

September 30, 

September 30, 

    

2021

    

2022

    

2021

    

2022

(unaudited)

Net sales

$

34,556

$

42,864

$

106,733

$

126,589

Cost of sales

 

23,634

 

30,928

 

73,470

 

88,944

Gross margin

 

10,922

 

11,936

 

33,263

 

37,645

Selling, general and administrative expense

 

5,791

 

6,016

 

16,557

 

17,674

Operating income

 

5,131

 

5,920

 

16,706

 

19,971

Interest income

 

289

 

558

 

945

 

1,109

Income before income taxes

 

5,420

 

6,478

 

17,651

 

21,080

Provision for income taxes

 

1,288

 

1,528

 

4,214

 

4,970

Net income

$

4,132

$

4,950

$

13,437

$

16,110

Basic and diluted net income per common share

$

.33

$

.40

$

1.08

$

1.30

Basic and diluted weighted average shares outstanding

 

12,406

 

12,307

 

12,417

 

12,352

See accompanying Notes to Condensed Consolidated Financial Statements.

- 4 -

COMPX INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

Three months ended September 30, 2021 and 2022 (unaudited)

Class A

Additional

Total

common

paid-in

Retained

Treasury

stockholders'

    

stock

    

capital

    

earnings

    

stock

    

equity

Balance at June 30, 2021

$

124

$

55,336

$

115,879

$

$

171,339

Net income

 

 

 

4,132

 

 

4,132

Cash dividends ($.20 per share)

 

 

 

(2,481)

 

 

(2,481)

Balance at September 30, 2021

$

124

$

55,336

$

117,530

$

$

172,990

Balance at June 30, 2022

$

123

$

53,155

$

123,155

$

$

176,433

Net income

 

 

 

4,950

 

 

4,950

Cash dividends ($2.00 per share)

 

 

 

(24,614)

 

 

(24,614)

Balance at September 30, 2022

$

123

$

53,155

$

103,491

$

$

156,769

Nine months ended September 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

 

 

 

13,437

 

 

13,437

Issuance of common stock

104

104

Treasury stock:

Acquired

(755)

(755)

Retired

(755)

755

Cash dividends ($.60 per share)

 

 

 

(7,452)

 

 

(7,452)

Balance at September 30, 2021

$

124

$

55,336

$

117,530

$

$

172,990

Balance at December 31, 2021

$

124

$

54,780

$

118,184

$

$

173,088

Net income

 

 

 

16,110

 

 

16,110

Issuance of common stock

118

118

Treasury stock:

Acquired

(1,744)

(1,744)

Retired

(1)

(1,743)

1,744

Cash dividends ($2.50 per share)

 

 

 

(30,803)

 

 

(30,803)

Balance at September 30, 2022

$

123

$

53,155

$

103,491

$

$

156,769

See accompanying Notes to Condensed Consolidated Financial Statements.

- 5 -

COMPX INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Nine months ended

September 30, 

    

2021

    

2022

(unaudited)

Cash flows from operating activities:

 

  

 

  

Net income

$

13,437

$

16,110

Depreciation and amortization

 

2,861

 

2,962

Deferred income taxes

 

426

 

(742)

Other, net

 

323

 

287

Change in assets and liabilities:

 

  

 

  

Accounts receivable, net

 

(4,374)

 

(3,634)

Inventories, net

 

(5,417)

 

(7,846)

Accounts payable and accrued liabilities

 

1,908

 

1,454

Accounts with affiliates

 

523

 

(347)

Prepaids and other, net

 

(1,592)

 

(122)

Net cash provided by operating activities

 

8,095

 

8,122

Cash flows from investing activities:

 

  

 

  

Capital expenditures

 

(2,266)

 

(3,008)

Proceeds from sale of fixed assets, net

 

 

131

Note receivable from affiliate:

 

  

 

  

Collections

 

33,100

 

21,100

Advances

 

(25,400)

 

(17,100)

Net cash provided by investing activities

 

5,434

 

1,123

Cash flows from financing activities:

Dividends paid

 

(7,452)

 

(30,803)

Treasury stock acquired

 

(755)

 

(1,744)

Net cash used in financing activities

 

(8,207)

 

(32,547)

Cash and cash equivalents - net change from:

Operating, investing and financing activities

5,322

(23,302)

Balance at beginning of period

 

70,637

 

76,579

Balance at end of period

$

75,959

$

53,277

Supplemental disclosures -

Cash paid for income taxes

$

3,361

$

6,080

See accompanying Notes to Condensed Consolidated Financial Statements.

- 6 -

COMPX INTERNATIONAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 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 September 30, 2022. At September 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 September 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 September 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.

Cash dividends in 2022 include a $1.75 per share special dividend.

Our operations are reported on a 52 or 53-week year. For presentation purposes, annual and quarterly information in the Condensed Consolidated Financial Statements and accompanying notes are presented as ended September 30, 2021 December 31, 2021 and September 30, 2022. The actual dates of our annual and quarterly periods are October 3, 2021, January 2, 2022 and October 2, 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

Nine months ended

September 30, 

September 30, 

    

2021

    

2022

    

2021

    

2022

(In thousands)

Net sales:

 

  

 

  

  

 

  

Security Products

$

25,829

$

28,493

$

79,301

$

86,911

Marine Components

 

8,727

 

14,371

 

27,432

 

39,678

Total net sales

$

34,556

$

42,864

$

106,733

$

126,589

Operating income:

 

  

 

  

 

  

 

  

Security Products

$

5,529

$

4,904

$

16,864

$

17,645

Marine Components

 

1,255

 

2,716

 

4,796

 

7,449

Corporate operating expenses

 

(1,653)

 

(1,700)

 

(4,954)

 

(5,123)

Total operating income

 

5,131

 

5,920

 

16,706

 

19,971

Interest income

 

289

 

558

 

945

 

1,109

Income before income taxes

$

5,420

$

6,478

$

17,651

$

21,080

Intersegment sales are not material.

Note 3 – Accounts receivable, net:

December 31, 

September 30, 

    

2021

    

2022

(In thousands)

Accounts receivable, net:

 

  

 

  

Security Products

$

12,896

$

14,106

Marine Components

 

2,720

 

5,131

Allowance for doubtful accounts

 

(70)

 

(70)

Total accounts receivable, net

$

15,546

$

19,167

Note 4 – Inventories, net:

December 31, 

September 30, 

    

2021

    

2022

(In thousands)

Raw materials:

 

  

 

  

Security Products

$

3,640

$

4,670

Marine Components

 

1,402

 

2,722

Total raw materials

 

5,042

 

7,392

Work-in-process:

 

  

 

  

Security Products

 

12,721

 

15,301

Marine Components

 

4,046

 

6,085

Total work-in-process

 

16,767

 

21,386

Finished goods:

 

  

 

  

Security Products

 

2,271

 

2,917

Marine Components

 

1,562

 

1,642

Total finished goods

 

3,833

 

4,559

Total inventories, net

$

25,642

$

33,337

- 8 -

Note 5 – Accounts payable and accrued liabilities:

December 31, 

September 30, 

    

2021

    

2022

(In thousands)

Accounts payable:

 

  

 

  

Security Products

$

2,594

$

3,120

Marine Components

 

814

 

2,051

Accrued liabilities:

 

  

 

  

Employee benefits

 

9,797

 

8,931

Taxes other than on income

 

391

 

520

Customer tooling

 

516

 

350

Advances from customers

271

Insurance

 

208

 

268

Deferred revenue

258

Other

 

404

 

370

Total accounts payable and accrued liabilities

$

14,724

$

16,139

Note 6 – Provision for income taxes:

Three months ended

Nine months ended

September 30, 

September 30, 

    

2021

    

2022

    

2021

    

2022

(In thousands)

Expected tax expense, at the U.S. federal statutory
  income tax rate of 21%

$

1,138

$

1,361

$

3,707

$

4,427

State income taxes

 

170

 

194

 

570

 

633

FDII benefit

 

(33)

 

(34)

 

(73)

 

(106)

Other, net

 

13

 

7

 

10

 

16

Total provision for income taxes

$

1,288

$

1,528

$

4,214

$

4,970

On August 16, 2022, the Inflation Reduction Act was signed into law. Among other things, this legislation provides for a 15% corporate alternative minimum tax on certain large corporations, imposes a 1% excise tax on qualifying stock buybacks for transactions occurring after December 31, 2022, and provides for certain energy-related tax credits. We have evaluated the relevant provisions of the Act and do not expect them to have a material impact on our tax provision.

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

- 9 -

these treasury shares and allocated their cost to common stock at par value and additional paid-in capital. At September 30, 2022, 523,647 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, 2021

September 30, 2022

Carrying

Fair

Carrying

Fair

    

amount

    

value

    

amount

    

value

(In thousands)

Cash and cash equivalents

$

76,579

$

76,579

$

53,277

$

53,277

Accounts receivable, net

 

15,546

 

15,546

 

19,167

 

19,167

Accounts payable

 

3,408

 

3,408

 

5,171

 

5,171

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 September 30, 2022, the outstanding principal balance receivable from Valhi under the promissory note was $14.7 million. Interest income (including unused commitment fees) on our loan to Valhi was $.9 million and $.7 million for the nine months ended September 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 third quarter of 2022 operating income increased to $5.9 million compared to $5.1 million in the third quarter of 2021. The increase in operating income in the third quarter of 2022 compared to 2021 is primarily due to higher Marine Components sales, somewhat offset by higher Security Products cost of sales. Operating income for the first nine months of 2022 was $20.0 million compared to $16.7 million in the first nine months of 2021. The increase in operating income in the first nine months of 2022 compared to 2021 is primarily due to higher Marine Components sales and to a lesser extent higher Security Products sales.

We sell a large number of products that have a wide variation in selling price and manufacturing cost, which results in certain practical limitations on our ability to quantify the impact of changes in individual product sales quantities and selling prices on our net sales, cost of sales and gross margin. In addition, small variations in period-to-period net sales, cost of sales and gross margin can result from changes in the relative mix of our products sold.

Results of Operations

    

Three months ended

 

September 30, 

 

2021

%  

2022

%

(Dollars in thousands)

 

Net sales

$

34,556

 

100.0

%  

$

42,864

 

100.0

%

Cost of sales

 

23,634

 

68.4

 

30,928

 

72.2

Gross margin

 

10,922

 

31.6

 

11,936

 

27.8

Operating costs and expenses

 

5,791

 

16.8

 

6,016

 

14.0

Operating income

$

5,131

 

14.8

%  

$

5,920

 

13.8

%

Nine months ended

 

September 30, 

 

    

2021

    

%

    

2022

    

%

(Dollars in thousands)

 

Net sales

$

106,733

 

100.0

%  

$

126,589

 

100.0

%

Cost of sales

 

73,470

 

68.8

 

88,944

 

70.3

Gross margin

 

33,263

 

31.2

 

37,645

 

29.7

Operating costs and expenses

 

16,557

 

15.5

 

17,674

 

13.9

Operating income

$

16,706

 

15.7

%  

$

19,971

 

15.8

%

- 12 -

Net sales. Net sales increased $8.3 million and $19.9 million in the third quarter and for the first nine 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 increased 3.8% in the third quarter of 2022 and 1.5% for the first nine months of 2022 compared to the same periods in 2021. As a result, gross margin as a percentage of sales decreased over the same periods. Gross margin percentage decreased in the third quarter and for the first nine months of 2022 compared to the same periods in 2021 primarily due to lower gross margin at Security Products. Additionally, lower Marine Components gross margin in the first quarter of 2022 compared to the first quarter of 2021 unfavorably impacted gross margin for the nine-month comparative period. 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 third quarter and the first nine months of 2022 were higher than the same periods in 2021 primarily due to higher salary and employment related costs which increased by $.2 million and $.7 million, respectively. Operating costs and expenses as a percentage of net sales decreased for the third quarter and the first nine months of 2022 due to the effect of higher sales.

Operating income. As a percentage of net sales, operating income declined in the third quarter of 2022 compared to the same period of 2021 due to the decline in gross margins primarily at Security Products noted above. For the first nine months of 2022 operating income as a percentage of net sales increased compared to the same period of 2021 primarily due to higher operating income percentages experienced during the first six months of the year. 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

    

Nine months ended

    

 

September 30, 

%  

September 30, 

%  

 

    

2021

    

2022

    

Change

    

2021

    

2022

    

Change

 

(Dollars in thousands)

(Dollars in thousands)

 

Security Products:

 

  

 

  

 

  

 

  

 

  

 

  

Net sales

$

25,829

$

28,493

 

10

%  

$

79,301

$

86,911

 

10

%

Cost of sales

 

17,055

 

20,241

 

19

 

53,445

 

59,629

 

12

Gross margin

 

8,774

 

8,252

 

(6)

 

25,856

 

27,282

 

6

Operating costs and expenses

 

3,245

 

3,348

 

3

 

8,992

 

9,637

 

7

Operating income

$

5,529

$

4,904

 

(11)

$

16,864

$

17,645

 

5

Gross margin

 

34.0

%  

 

29.0

%  

 

32.6

%  

 

31.4

%  

  

Operating income margin

 

21.4

 

17.2

 

 

21.3

 

20.3

 

  

Security Products. Security Products net sales increased 10% in each of the third quarter and first nine months of 2022 compared to the same periods last year. Relative to prior year, third quarter sales were $.7 million higher to the government security market, $.5 million higher to the office furniture market and $.4 million higher to the gas station security market. Relative to prior year, sales for the first nine months were $2.7 million higher to the government security

- 13 -

market, $1.9 million higher to the office furniture market, $1.0 million higher to distributors and $.7 million higher to each of the gas station security and general cabinetry markets.

Gross margin as a percentage of net sales for the third quarter and the first nine months of 2022 decreased as compared to the same periods in 2021 primarily due to higher costs of sales as price increases and surcharges did not fully offset higher cost inventory sold during the third quarter. Operating income as a percentage of net sales decreased in the third quarter and the first nine months of 2022 compared to the same periods in 2021 primarily due to the factors impacting gross margin,  as well as increased operating costs and expenses resulting from higher salaries and benefits, partially offset by increased coverage of operating costs and expenses from higher sales.

Three months ended

Nine months ended

    

 

September 30, 

%  

September 30, 

%  

 

    

2021

    

2022

    

Change

    

2021

    

2022

    

Change

 

(Dollars in thousands)

(Dollars in thousands)

 

Marine Components:

 

  

 

  

 

  

 

  

 

  

 

  

Net sales

$

8,727

$

14,371

 

65

%  

$

27,432

$

39,678

 

45

%

Cost of sales

 

6,579

 

10,687

 

62

 

20,025

 

29,315

 

46

Gross margin

 

2,148

 

3,684

 

72

 

7,407

 

10,363

 

40

Operating costs and expenses

 

893

 

968

 

8

 

2,611

 

2,914

 

12

Operating income

$

1,255

$

2,716

 

116

$

4,796

$

7,449

 

55

Gross margin

 

24.6

%  

 

25.6

%  

 

27.0

%  

 

26.1

%  

  

Operating income margin

 

14.4

 

18.9

 

 

17.5

 

18.8

 

  

Marine Components. Marine Components net sales in the third quarter and first nine months of 2022 increased 65% and 45%, respectively, compared to the same periods in 2021. Relative to prior year, third quarter sales were $3.5 million higher to the towboat market, $.9 million higher to the industrial market and $.8 million higher to the engine builder market. Relative to prior year, sales for the first nine months were $9.2 million higher to the towboat market, $1.2 million higher to the industrial market and $1.1 million higher to the engine builder market.

As a percentage of net sales, gross margin and operating income for the third quarter of 2022 increased compared to the same period in 2021 due to increased sales as a result of increased sales volumes and surcharges, implemented to recover higher production costs, as well as increased coverage of cost of sales, operating costs and expenses from higher sales. For the first nine 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 first nine months of 2022 increased compared to the same period in 2021 due to increased coverage of operating costs and expenses from higher sales, partially offset by the factors impacting gross margin.

Outlook. During the first nine months of 2022, we have experienced strong demand at both our segments. We operated our manufacturing facilities at elevated production rates during the first nine months 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, we have been able to achieve and maintain more balanced staffing levels aligned with current and forecasted demand, particularly at our Marine Components segment.

Thus far, the softening in demand Security Products has experienced in the transportation market has been more than offset by continued strong demand in other markets, particularly the government security and office furniture market. We expect gross margins at Security Products will continue to be challenged for the remainder of the year as higher cost inventory continues to work its way through cost of sales. Marine Components demand remains strong and with the implementation of price increases for the new model year at the beginning of the third quarter, we expect to maintain gross margins comparable to 2021 at the segment during the fourth quarter. Based on our strong performance through the first nine months, we expect to report increased net sales and operating income from both segments for the full year 2022

- 14 -

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 of 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 price increases and surcharges which have partially offset our increased production costs although, particularly at Security Products, we are increasingly unable to fully recover our cost increases. The extent to which future price increases and surcharges will mitigate rising costs is uncertain. We continue to take actions we believe will minimize supply related disruptions, manage inventory turnover, improve operating margins and maintain a safe working 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 nine months of 2022 was comparable to the first nine months of 2021 primarily due to the net effects of:

A $3.3 million increase in operating income in 2022,
A $2.7 million increase in cash paid for taxes in 2022 due to higher operating income and the relative timing of payments, and
A $.7 million increase in the amount of net cash used by relative changes in our inventories, receivables, prepaids, payables and non-tax related accruals 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 September 30, 2022 varied by segment primarily as a result of relative changes in the timing of sales relative to the end of the quarter. For comparative purposes, we have provided December 31, 2020 and September 30, 2021 numbers below.

December 31, 

September 30, 

December 31, 

September 30, 

Days Sales Outstanding:

    

2020

    

2021

    

2021

    

2022

Security Products

 

35 Days

 

42 Days

46 Days

 

45 Days

Marine Components

 

24 Days

 

33 Days

30 Days

 

32 Days

Consolidated CompX

 

33 Days

 

40 Days

42 Days

 

41 Days

Our average number of days in inventory increased from December 31, 2021 to September 30, 2022 due to increased inventories of certain components and raw materials that had longer lead times or for which we have experienced availability issues and from the timing of sales relative to the end of the quarter, primarily at Security Products. For comparative purposes, we have provided December 31, 2020 and September 30, 2021 numbers below.

- 15 -

December 31, 

September 30, 

December 31, 

September 30, 

Days in Inventory:

    

2020

    

2021