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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 June 30, 2024

☐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 30, 2024, the registrant had 12,318,557 shares of Class A common stock, $.01 par value per share, outstanding.

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COMPX INTERNATIONAL INC.

Index


		Page
Part I.	FINANCIAL INFORMATION
Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets – December 31, 2023 and June 30, 2024 (unaudited)	- 3 -

	Condensed Consolidated Statements of Income and Comprehensive Income (unaudited) – Three and six months ended June 30, 2023 and 2024	- 4 -

	Condensed Consolidated Statements of Stockholders’ Equity (unaudited) – Three and six months ended June 30, 2023 and 2024	- 5 -

	Condensed Consolidated Statements of Cash Flows (unaudited) –Six months ended June 30, 2023 and 2024	- 6 -

	Notes to Condensed Consolidated Financial Statements (unaudited)	- 7 -

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	- 12 -

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	- 18 -

Item 4.	Controls and Procedures	- 18 -

Part II.	OTHER INFORMATION

Item 1.	Legal Proceedings	- 20 -

Item 1A.	Risk Factors	- 20 -

Item 6.	Exhibits	- 20 -

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

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COMPX INTERNATIONAL INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)


	December 31,		June 30,
ASSETS	2023		2024
			(unaudited)
Current assets:
Cash and cash equivalents	$	41,393	$	70,172
Marketable securities		35,354		11,934
Accounts receivable, net		17,061		15,435
Inventories, net		30,712		27,363
Prepaid expenses and other		2,110		1,768
Total current assets		126,630		126,672

Other assets:
Note receivable from affiliate		10,600		9,200
Goodwill		23,742		23,742
Other noncurrent assets		769		723
Total other assets		35,111		33,665

Property and equipment:
Land		5,390		5,390
Buildings		23,239		23,262
Equipment		74,315		74,651
Construction in progress		676		770
		103,620		104,073
Less accumulated depreciation		77,757		79,336
Net property and equipment		25,863		24,737
Total assets	$	187,604	$	185,074

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable and accrued liabilities	$	15,745	$	13,164
Income taxes payable to affiliate		1,460		560
Total current liabilities		17,205		13,724

Noncurrent liabilities:
Deferred income taxes		1,509		1,141
Other		41		26
Total noncurrent liabilities		1,550		1,167

Stockholders' equity:
Preferred stock		—		—
Class A common stock		123		123
Additional paid-in capital		53,275		53,396
Retained earnings		115,457		116,665
Accumulated other comprehensive loss - unrealized loss on marketable securities		(6)		(1)
Total stockholders' equity		168,849		170,183
Total liabilities and stockholders’ equity	$	187,604	$	185,074

Commitments and contingencies (Note 8)

See accompanying Notes to Condensed Consolidated Financial Statements.

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COMPX INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(In thousands, except per share data)


	Three months ended				Six months ended
	June 30,				June 30,
	2023		2024		2023		2024

	(unaudited)
Net sales	$	36,616	$	35,887	$	77,767	$	73,858
Cost of sales		26,343		24,722		54,790		53,026
Gross margin		10,273		11,165		22,977		20,832
Selling, general and administrative expense		5,906		6,084		11,570		12,036
Operating income		4,367		5,081		11,407		8,796
Interest income		992		1,295		1,939		2,519
Income before income taxes		5,359		6,376		13,346		11,315
Provision for income taxes		1,287		1,532		3,206		2,717
Net income	$	4,072	$	4,844	$	10,140	$	8,598

Other comprehensive income (loss), marketable securities adjustment:
Unrealized income (loss) arising during year, net		(72)		10		(102)		5
Comprehensive income	$	4,000	$	4,854	$	10,038	$	8,603

Basic and diluted net income per common share	$	.33	$	.39	$	.82	$	.70

Basic and diluted weighted average shares outstanding		12,310		12,316		12,309		12,315

See accompanying Notes to Condensed Consolidated Financial Statements.

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COMPX INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)


	Three months ended June 30, 2023 and 2024 (unaudited)
							Accumulated
	Class A		Additional				other		Total
	common		paid-in		Retained		comprehensive		stockholders'
	stock		capital		earnings		loss		equity
Balance at March 31, 2023	$	123	$	53,155	$	108,166	$	(47)	$	161,397
Net income		—		—		4,072		—		4,072
Issuance of common stock		—		120		—		—		120
Cash dividends ($.25 per share)		—		—		(3,078)		—		(3,078)
Other comprehensive loss		—		—		—		(72)		(72)
Balance at June 30, 2023	$	123	$	53,275	$	109,160	$	(119)	$	162,439

Balance at March 31, 2024	$	123	$	53,275	$	115,517	$	(11)	$	168,904
Net income		—		—		4,844		—		4,844
Issuance of common stock		—		121		—		—		121
Cash dividends ($.30 per share)		—		—		(3,696)		—		(3,696)
Other comprehensive income		—		—		—		10		10
Balance at June 30, 2024	$	123	$	53,396	$	116,665	$	(1)	$	170,183


	Six months ended June 30, 2023 and 2024 (unaudited)
							Accumulated
	Class A		Additional				other		Total
	common		paid-in		Retained		comprehensive		stockholders'
	stock		capital		earnings		loss		equity
Balance at December 31, 2022	$	123	$	53,155	$	105,175	$	(17)	$	158,436
Net income		—		—		10,140		—		10,140
Issuance of common stock		—		120		—		—		120
Cash dividends ($.50 per share)		—		—		(6,155)		—		(6,155)
Other comprehensive loss		—		—		—		(102)		(102)
Balance at June 30, 2023	$	123	$	53,275	$	109,160	$	(119)	$	162,439

Balance at December 31, 2023	$	123	$	53,275	$	115,457	$	(6)	$	168,849
Net income		—		—		8,598		—		8,598
Issuance of common stock		—		121		—		—		121
Cash dividends ($.60 per share)		—		—		(7,390)		—		(7,390)
Other comprehensive income		—		—		—		5		5
Balance at June 30, 2024	$	123	$	53,396	$	116,665	$	(1)	$	170,183

See accompanying Notes to Condensed Consolidated Financial Statements.

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COMPX INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


	Six months ended
	June 30,
	2023		2024

	(unaudited)
Cash flows from operating activities:
Net income	$	10,140	$	8,598
Depreciation and amortization		2,009		1,846
Deferred income taxes		(421)		(370)
Noncash interest income		(855)		(574)
Other, net		232		267
Change in assets and liabilities:
Accounts receivable, net		2,794		1,628
Inventories, net		(2,585)		3,201
Accounts payable and accrued liabilities		(1,619)		(2,586)
Accounts with affiliates		(208)		(900)
Prepaids and other, net		281		389
Net cash provided by operating activities		9,768		11,499

Cash flows from investing activities:
Capital expenditures		(478)		(730)
Marketable securities:
Purchases		(24,925)		—
Proceeds from maturities		12,000		24,000
Note receivable from affiliate:
Collections		14,700		13,400
Advances		(13,700)		(12,000)
Net cash provided by (used in) investing activities		(12,403)		24,670

Cash flows from financing activities -
Dividends paid		(6,155)		(7,390)

Cash and cash equivalents - net change from:
Operating, investing and financing activities		(8,790)		28,779
Balance at beginning of period		26,748		41,393
Balance at end of period	$	17,958	$	70,172

Supplemental disclosures -
Cash paid for income taxes	$	3,847	$	4,006

See accompanying Notes to Condensed Consolidated Financial Statements.

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COMPX INTERNATIONAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2024

(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, 2024. At June 30, 2024, Valhi, Inc. (NYSE: VHI) owned approximately 83% of NL’s outstanding common stock and a wholly-owned subsidiary of Contran Corporation owned approximately 91% of Valhi’s outstanding common stock. A majority of Contran’s outstanding voting stock is held directly by Lisa K. Simmons, Thomas C. Connelly (the husband of Ms. Simmons’ late sister) and various family trusts established for the benefit of Ms. Simmons, Mr. Connelly and their children and for which Ms. Simmons, Mr. Connelly or Mr. Connelly’s sister, as applicable, serve as trustee (collectively, the “Other Trusts”). With respect to the Other Trusts for which Mr. Connelly or his sister serves as trustee, the trustee 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, 2024 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, 2023 that we filed with the Securities and Exchange Commission (“SEC”) on February 28, 2024 (the “2023 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, 2023 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, 2023) 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, 2024 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 2023 Consolidated Financial Statements contained in our 2023 Annual Report.

On August 6, 2024 our board of directors declared a special cash dividend of $2.00 per share on our Class A common stock payable on August 28, 2024 to stockholders of record at the close of business on August 19, 2024.

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, 2023, December 31, 2023 and June 30, 2024. The actual dates of our annual and quarterly periods are July 2, 2023, December 31, 2023 and June 30, 2024, 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.

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Note 2 – Business segment information:


	Three months ended				Six months ended
	June 30,				June 30,
	2023		2024		2023		2024

	(In thousands)
Net sales:
Security Products	$	25,672	$	28,213	$	53,014	$	58,100
Marine Components		10,944		7,674		24,753		15,758
Total net sales	$	36,616	$	35,887	$	77,767	$	73,858

Operating income:
Security Products	$	4,134	$	5,442	$	9,513	$	10,892
Marine Components		1,943		1,387		5,260		1,421
Corporate operating expenses		(1,710)		(1,748)		(3,366)		(3,517)
Total operating income		4,367		5,081		11,407		8,796
Interest income		992		1,295		1,939		2,519
Income before income taxes	$	5,359	$	6,376	$	13,346	$	11,315

Intersegment sales are not material.

Note 3 – Marketable securities:


			Amortized		Unrealized
	Market value		cost basis		loss, net

	(In thousands)
December 31, 2023:
Current assets	$	35,354	$	35,359	$	(5)

June 30, 2024:
Current assets	$	11,934	$	11,935	$	(1)

Our marketable securities consist of investments in debt securities, currently U.S. government treasuries. We classify our marketable securities as available-for-sale. The fair value of our marketable securities is generally determined using Level 2 inputs because although these securities are traded, in many cases the market is not active and the quarter-end valuation is generally based on the last trade of the quarter, which may be several days prior to quarter end. We accumulate unrealized gains and losses on marketable debt securities as part of accumulated other comprehensive income (loss), net of related deferred income taxes.

Note 4 – Accounts receivable, net:


	December 31,		June 30,
	2023		2024

	(In thousands)
Accounts receivable, net:
Security Products	$	14,950	$	12,596
Marine Components		2,181		2,909
Allowance for doubtful accounts		(70)		(70)
Total accounts receivable, net	$	17,061	$	15,435

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Note 5 – Inventories, net:


	December 31,		June 30,
	2023		2024

	(In thousands)
Raw materials:
Security Products	$	3,569	$	3,658
Marine Components		2,169		1,596
Total raw materials		5,738		5,254
Work-in-process:
Security Products		13,879		12,213
Marine Components		5,163		4,858
Total work-in-process		19,042		17,071
Finished goods:
Security Products		3,175		2,825
Marine Components		2,757		2,213
Total finished goods		5,932		5,038
Total inventories, net	$	30,712	$	27,363

Note 6 – Accounts payable and accrued liabilities:


	December 31,		June 30,
	2023		2024

	(In thousands)
Accounts payable:
Security Products	$	2,514	$	3,103
Marine Components		634		680
Corporate		—		8
Accrued liabilities:
Employee benefits		10,712		6,862
Deferred revenue		559		461
Insurance		289		334
Taxes other than on income		285		344
Advances from customers		267		133
Customer tooling		145		347
Professional services		—		533
Other		340		359
Total accounts payable and accrued liabilities	$	15,745	$	13,164

Note 7 – Provision for income taxes:


	Three months ended				Six months ended
	June 30,				June 30,
	2023		2024		2023		2024

	(In thousands)
Expected tax expense, at the U.S. federal statutory income tax rate of 21%	$	1,126	$	1,339	$	2,803	$	2,376
State income taxes		161		188		401		333
Other, net		—		5		2		8
Total provision for income taxes	$	1,287	$	1,532	$	3,206	$	2,717

Comprehensive provision for income taxes allocable to:
Net income	$	1,287	$	1,532	$	3,206	$	2,717
Other comprehensive income (loss) - marketable securities		(18)		1		(31)		—
Total	$	1,269	$	1,533	$	3,175	$	2,717

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Note 8 – Commitments and contingencies:

From time to time, we may be involved in various environmental, contractual, product liability, patent (or intellectual property), employment and other claims and disputes incidental to our business. At least quarterly our management discusses and evaluates the status of any pending litigation to which we are a party. The factors considered in such evaluation include, among other things, the nature of such pending cases, the status of such pending cases, the advice of legal counsel and our experience in similar cases (if any). Based on such evaluation, we make a determination as to whether we believe (i) it is probable a loss has been incurred, and if so if the amount of such loss (or a range of loss) is reasonably estimable, or (ii) it is reasonably possible but not probable a loss has been incurred, and if so if the amount of such loss (or a range of loss) is reasonably estimable, or (iii) the probability a loss has been incurred is remote. We have not accrued any amounts for litigation matters because it is not reasonably possible we have incurred a loss that would be material to our consolidated financial statements, results of operations or liquidity.

Note 9 – Financial instruments:

See Note 3 for information on how we determine the fair value of our marketable securities.

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

December 31, 2023

June 30, 2024

Carrying

Fair

Carrying

Fair

amount

value

amount

value

(In thousands)

Cash and cash equivalents

41,393

70,172

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

Note 10 – 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 $25 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, 2025. Loans made to Valhi at any time under the agreement are at our discretion. At June 30, 2024, the outstanding principal balance receivable from Valhi under the promissory note was $9.2 million. Interest income (including unused commitment fees) on our loan to Valhi was $.6 million and $.5 million for the six months ended June 30, 2023 and 2024, respectively.

Note 11 – Recent Accounting Pronouncements:

In November 2023, the Financial Accounting Standards Board (“FASB”) issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The ASU requires public companies to disclose significant segment expenses and other segment items on an annual and interim basis. The ASU also mandates public companies to provide all annual segment disclosures currently required annually in interim periods. Public companies will also be required to disclose the title and position of the chief operating decision maker (“CODM”) and explain how the CODM uses the reported measure of segment profit or loss in assessing segment performance and allocation of resources. The ASU is effective for us beginning with our 2024 Annual Report, and for interim reporting, in the first quarter of 2025, with retrospective application required. We are in the process of evaluating the additional disclosure requirements across all segments.

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In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The ASU requires additional annual disclosure and disaggregation for the rate reconciliation, income taxes paid and income tax expense by federal, state and foreign tax jurisdictions. In addition, the standard increases the disclosure requirements for items included in the rate reconciliation that meet a quantitative threshold. The ASU is effective for us beginning with our 2025 Annual Report. The ASU may be applied prospectively; however, entities have the option to apply it retrospectively. We are in the process of evaluating the additional disclosure requirements.

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Business Overview

We are a leading manufacturer of engineered components utilized in a variety of applications and industries. Through our Security Products segment we manufacture mechanical and electrical cabinet locks and other locking mechanisms used in postal, recreational transportation, office and institutional furniture, cabinetry, tool storage and healthcare applications. We also manufacture wake enhancement systems, stainless steel exhaust systems, gauges, throttle controls, 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,

●

Pending or possible 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,

●

Government laws and regulations and possible changes therein, including new environmental, health and safety, sustainability or other regulations,

●

General global economic and political conditions that disrupt our supply chain, reduce demand or perceived demand for component products or impair our ability to operate our facilities (including changes in the level of gross domestic product in various regions of the world, natural disasters, terrorist acts, global conflicts and public health crises),

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●

Operating interruptions (including, but not limited to, labor disputes, leaks, natural disasters, fires, explosions, unscheduled or unplanned downtime, transportation interruptions, certain regional and world events or economic conditions and public health crises);

●

Technology related disruptions (including, but not limited to, cyber attacks; software implementation, upgrades or improvements; technology processing failures; or other events) related to our technology infrastructure that could impact our ability to continue operations, or at key vendors which could impact our supply chain, or at key customers which could impact their operations and cause them to curtail or pause orders; 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

Operating income in the second quarter of 2024 was $5.1 million compared to $4.4 million in the second quarter of 2023. The increase in operating income in the second quarter of 2024 compared to 2023 is due to higher Security Products sales and gross margin which more than offset lower Marine Components sales and gross margin. Operating income for the first six months of 2024 was $8.8 million compared to $11.4 million in the first six months of 2023. The decrease in operating income in the first six months of 2024 compared to 2023 is primarily due to lower Marine Components sales and gross margin partially offset by higher Security Products sales and higher Security Products gross margin in the second quarter of 2024 compared to the second quarter of 2023.

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,
	2023		%		2024		%

	(Dollars in thousands)
Net sales	$	36,616	100.0	%	$	35,887	100.0	%
Cost of sales		26,343	71.9			24,722	68.9
Gross margin		10,273	28.1			11,165	31.1
Operating costs and expenses		5,906	16.1			6,084	17.0
Operating income	$	4,367	12.0	%	$	5,081	14.1	%


	Six months ended
	June 30,
	2023		%		2024		%

	(Dollars in thousands)
Net sales	$	77,767	100.0	%	$	73,858	100.0	%
Cost of sales		54,790	70.5			53,026	71.8
Gross margin		22,977	29.5			20,832	28.2
Operating costs and expenses		11,570	14.8			12,036	16.3
Operating income	$	11,407	14.7	%	$	8,796	11.9	%

Net sales. Net sales decreased $.7 million and $3.9 million in the second quarter and for the first six months of 2024, respectively, compared to the same periods in 2023 due to lower Marine Components sales primarily to the towboat

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market, partially offset by higher Security Products sales to the government security market. See segment discussion below.

Cost of sales and gross margin. Cost of sales as a percentage of sales improved 3.0% in the second quarter of 2024 compared to the same period in 2023. As a result, gross margin as a percentage of sales increased over the same period. Gross margin percentage increased in the second quarter of 2024 compared to the same period in 2023 primarily due to higher Security Products gross margin percentage and, to a lesser extent, higher gross margin percentage at Marine Components. Cost of sales as a percentage of sales increased 1.3% for the first six months of 2024 compared to the same period in 2023. As a result, gross margin as a percentage of sales declined over the same period. The decline in gross margin percentage for the six-month comparative period is primarily due to lower gross margin percentage at Marine Components, particularly in the first quarter of 2024, partially offset by higher gross margin percentage at Security Products in the second quarter of 2024. 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 and for the first six months of 2024 increased $.2 million and $.5 million, respectively, compared to the same periods in 2023 primarily due to higher employee salaries and benefits at Security Products. Operating costs and expenses as a percentage of net sales increased for the second quarter and for the first six months of 2024 due to the increased operating costs and expenses mentioned above and decreased coverage of operating costs and expenses as a result of lower sales.

Operating income. As a percentage of net sales, operating income for the second quarter and the first six months of 2024 compared to the same periods of 2023 was primarily impacted by the factors affecting sales, cost of sales, gross margin and operating costs and expenses. See segment discussion below.

Interest income. Interest income increased $.3 million and $.6 million in the second quarter and for the first six months of 2024, respectively, compared to the same periods in 2023 primarily due to higher average interest rates and higher average investment balances, somewhat offset by lower average balances on the revolving promissory note receivable from Valhi. See Notes 3 and 10 to our Condensed Consolidated Financial Statements.

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 7 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

Key performance indicators for our segments are gross margin and operating income.


	Three months ended								Six months ended
	June 30,						%		June 30,						%
	2023			2024			Change		2023			2024			Change

	(Dollars in thousands)								(Dollars in thousands)
Security Products:
Net sales	$	25,672		$	28,213		10	%	$	53,014		$	58,100		10	%
Cost of sales		18,253			19,261		6			37,128			40,376		9
Gross margin		7,419			8,952		21			15,886			17,724		12
Operating costs and expenses		3,285			3,510		7			6,373			6,832		7
Operating income	$	4,134		$	5,442		32		$	9,513		$	10,892		14

Gross margin		28.9	%		31.7	%				30.0	%		30.5	%
Operating income margin		16.1			19.3					17.9			18.7

Security Products. Security Products net sales increased 10% in each of the second quarter and first six months of 2024 compared to the same periods in 2023. Relative to prior year, the increase in second quarter sales was primarily due to $2.8 million higher sales to the government security market partially offset by $.4 million lower sales to distributors.

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Relative to prior year, the increase in sales for the first six months was primarily due to $4.6 million higher sales to the government security market partially offset by $.5 million lower sales to distributors.

Gross margin and operating income as a percentage of net sales for the second quarter and the first six months of 2024 increased as compared to the same periods in 2023 primarily due to effects of higher sales and increased coverage of fixed costs and operating costs and expenses as a result of higher sales, partially offset by a less favorable customer and product mix and increased operating costs and expenses related to higher employee salaries and benefits.