Table of Contents
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
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 ofincorporation or organization)
(IRS EmployerIdentification 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.
Index
Page
Part I.
FINANCIAL INFORMATION
Item 1.
Financial Statements
Condensed Consolidated Balance Sheets – December 31, 2021 and September 30, 2022 (unaudited)
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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
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Notes to Condensed Consolidated Financial Statements (unaudited)
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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Item 3.
Quantitative and Qualitative Disclosure About Market Risk
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Item 4.
Controls and Procedures
Part II.
OTHER INFORMATION
Item 1A.
Risk Factors
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Item 6.
Exhibits
Items 2, 3, 4 and 5 of Part II are omitted because there is no information to report.
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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
Other noncurrent assets
597
590
Total other assets
43,039
39,032
Property and equipment:
Land
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
2,237
Stockholders' equity:
Preferred 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
Commitments and contingencies (Note 1)
See accompanying Notes to Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Three months ended
Nine months ended
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
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Three months ended September 30, 2021 and 2022 (unaudited)
Class A
Additional
Total
common
paid-in
Retained
Treasury
stockholders'
stock
capital
earnings
equity
Balance at June 30, 2021
55,336
115,879
171,339
Cash dividends ($.20 per share)
(2,481)
Balance at September 30, 2021
117,530
172,990
Balance at June 30, 2022
123,155
176,433
Cash dividends ($2.00 per share)
(24,614)
Balance at September 30, 2022
Nine months ended September 30, 2021 and 2022 (unaudited)
Balance at December 31, 2020
55,987
111,545
167,656
Issuance of common stock
104
Treasury stock:
Acquired
(755)
Retired
755
Cash dividends ($.60 per share)
(7,452)
Balance at December 31, 2021
118
(1,744)
(1)
(1,743)
1,744
Cash dividends ($2.50 per share)
(30,803)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Depreciation and amortization
2,861
2,962
426
(742)
Other, net
323
287
Change in assets and liabilities:
(4,374)
(3,634)
(5,417)
(7,846)
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
Treasury stock acquired
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
Balance at end of period
75,959
Supplemental disclosures -
Cash paid for income taxes
3,361
6,080
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
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.
Note 2 – Business segment information:
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
Operating income:
5,529
4,904
16,864
17,645
1,255
2,716
4,796
7,449
Corporate operating expenses
(1,653)
(1,700)
(4,954)
(5,123)
Total operating income
Intersegment sales are not material.
Note 3 – Accounts receivable, net:
Accounts receivable, net:
12,896
14,106
2,720
Allowance for doubtful accounts
(70)
Total accounts receivable, net
Note 4 – Inventories, net:
Raw materials:
3,640
4,670
1,402
2,722
Total raw materials
5,042
7,392
Work-in-process:
12,721
15,301
4,046
6,085
Total work-in-process
16,767
21,386
Finished goods:
2,271
2,917
1,562
1,642
Total finished goods
3,833
4,559
Total inventories, net
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Note 5 – Accounts payable and accrued liabilities:
Accounts payable:
2,594
3,120
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
404
370
Total accounts payable and accrued liabilities
Note 6 – Provision for income taxes:
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)
13
7
10
16
Total provision for income taxes
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
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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
Carrying
Fair
amount
value
Accounts payable
3,408
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.
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ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Business Overview
We are a leading manufacturer of engineered components utilized in a variety of applications and industries. Through our Security Products segment we manufacture mechanical and electrical cabinet locks and other locking mechanisms used in recreational transportation, postal, office and institutional furniture, cabinetry, tool storage and healthcare applications. We also manufacture stainless steel exhaust systems, gauges, throttle controls, wake enhancement systems, trim tabs and related hardware and accessories for the recreational marine and other industries through our Marine Components segment.
General
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Statements in this Quarterly Report that are not historical facts are forward-looking in nature and represent management’s beliefs and assumptions based on currently available information. In some cases, you can identify forward-looking statements by the use of words such as “believes,” “intends,” “may,” “should,” “could,” “anticipates,” “expects” or comparable terminology, or by discussions of strategies or trends. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we do not know if these expectations will be correct. Such statements by their nature involve substantial risks and uncertainties that could significantly impact expected results. Actual future results could differ materially from those predicted. The factors that could cause actual future results to differ materially from those described herein are the risks and uncertainties discussed in this Quarterly Report and those described from time to time in our other filings with the SEC and include, but are not limited to, the following:
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
%
(Dollars in thousands)
100.0
68.4
72.2
31.6
27.8
Operating costs and expenses
16.8
14.0
14.8
13.8
68.8
70.3
31.2
29.7
15.5
13.9
15.7
15.8
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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.
Change
Security Products:
17,055
20,241
19
53,445
59,629
12
8,774
8,252
(6)
25,856
27,282
6
3,245
3,348
3
8,992
9,637
(11)
5
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
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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.
Marine Components:
65
45
6,579
10,687
62
20,025
29,315
46
2,148
3,684
72
7,407
10,363
40
893
968
8
2,611
2,914
116
55
24.6
25.6
27.0
26.1
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
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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:
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.
Days Sales Outstanding:
2020
35 Days
42 Days
46 Days
45 Days
24 Days
33 Days
30 Days
32 Days
Consolidated CompX
40 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.
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Days in Inventory:
75 Days
91 Days
95 Days
103 Days
90 Days
97 Days
89 Days
96 Days
98 Days
Investing activities. Our capital expenditures were $3.0 million and $2.3 million in the first nine months of 2022 and 2021, respectively. During the first nine months of 2022, Valhi repaid a net $4.0 million under the promissory note ($17.1 million of gross borrowings and $21.1 million of gross repayments). During the first nine months of 2021, Valhi repaid a net $7.7 million under the promissory note ($25.4 million of gross borrowings and $33.1 million of gross repayments). See Note 9 to our Condensed Consolidated Financial Statements.
Financing activities. In March 2022, our board of directors increased our regular quarterly dividend from $.20 per share to $.25 per share beginning in the first quarter of 2022. In addition, our board of directors declared a special dividend on our Class A common stock of $1.75 per share that we paid on August 30, 2022. The declaration and payment of future dividends and the amount thereof, if any, is discretionary and is dependent upon our results of operations, financial condition, cash requirements for our businesses, contractual requirements and restrictions and other factors deemed relevant by our board of directors. The amount and timing of past dividends is not necessarily indicative of the amount or timing of any future dividends which we might pay.
During the second quarter of 2022, we acquired 78,900 shares of our Class A common stock (8,900 shares from affiliates and 70,000 shares in a single market transaction) for an aggregate purchase price of $1.7 million. During the first quarter of 2021, we acquired 50,000 shares of our Class A common stock in a market transaction for $.8 million. See Note 7 to our Condensed Consolidated Financial Statements.
Future cash requirements –
Liquidity. Our primary source of liquidity on an ongoing basis is our cash flow from operating activities, which is generally used to (i) fund capital expenditures, (ii) repay short-term or long-term indebtedness incurred primarily for capital expenditures, investment activities or reducing our outstanding stock, (iii) provide for the payment of dividends (if declared), and (iv) lend to affiliates. From time-to-time, we will incur indebtedness, primarily to fund capital expenditures or business combinations.
Periodically, we evaluate liquidity requirements, alternative uses of capital, capital needs and available resources in view of, among other things, our capital expenditure requirements, dividend policy and estimated future operating cash flows. As a result of this process, we have in the past and may in the future seek to raise additional capital, refinance or restructure indebtedness, issue additional securities, modify our dividend policy or take a combination of such steps to manage our liquidity and capital resources. In the normal course of business, we may review opportunities for acquisitions, joint ventures or other business combinations in the component products industry. In the event of any such transaction, we may consider using available cash, issuing additional equity securities or increasing our indebtedness or that of our subsidiaries.
We believe that cash generated from operations together with cash on hand, as well as our ability to obtain external financing, will be sufficient to meet our liquidity needs for working capital, capital expenditures, debt service, dividends (if declared) and any amounts we might loan from time to time under the terms of our revolving loan to Valhi discussed in Note 9 to our Condensed Consolidated Financial Statements (which loans would be solely at our discretion) for both the next 12 months and five years. To the extent that our actual operating results or other developments differ from our expectations, our liquidity could be adversely affected.
All of our $53.3 million aggregate cash and cash equivalents at September 30, 2022 were held in the U.S.
Capital expenditures. Firm purchase commitments for capital projects in process at September 30, 2022 totaled $.5 million. We expect to spend $4.7 million during 2022 on capital investments. Beginning in the third quarter and through
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the remainder of the year, investments are expected to be limited primarily to those expenditures required to meet our existing customer demand and to properly maintain our facilities and technology infrastructure.
Stock repurchase program. At September 30, 2022, we have 523,647 shares available for repurchase under a stock repurchase program authorized by our board of directors. See Note 7 to our Condensed Consolidated Financial Statements.
Commitments and contingencies. There have been no material changes in our contractual obligations since we filed our 2021 Annual Report and we refer you to that report for a complete description of these commitments.
Recent accounting pronouncements –
None.
Critical accounting policies –
There have been no changes in the first nine months of 2022 with respect to our critical accounting policies presented in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2021 Annual Report.
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to market risk from changes in interest rates and raw material prices. There have been no material changes in these market risks since we filed our 2021 Annual Report, and we refer you to Part I, Item 7A – “Quantitative and Qualitative Disclosure About Market Risk” in our 2021 Annual Report. See also Note 8 to the Condensed Consolidated Financial Statements.
ITEM 4.CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures which, as defined in Exchange Act Rule 13a-15(e), means controls and other procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit to the SEC under the Securities Exchange Act of 1934, as amended (the “Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit to the SEC under the Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions to be made regarding required disclosure. Our management with the participation of Scott C. James, our President and Chief Executive Officer, and Amy A. Samford, our Executive Vice President and Chief Financial Officer, has evaluated the design and operating effectiveness of our disclosure controls and procedures as of September 30, 2022. Based upon their evaluation, these executive officers have concluded that our disclosure controls and procedures are effective as of the date of such evaluation.
Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting which, as defined in Exchange Act Rule 13a-15(f), means a process designed by, or under the supervision of, our principal executive and principal financial officers, or persons performing similar functions, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:
Changes in Internal Control Over Financial Reporting. There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II. OTHER INFORMATION
ITEM 1A.Risk Factors.
Reference is made to the 2021 Annual Report for a discussion of risk factors related to our businesses.
ITEM 6.Exhibits.
Item No.
Exhibit Index
31.1
Certification
32.1
101.INS
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
Inline XBRL Taxonomy Extension Schema
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
Date: November 2, 2022
By:
/s/ Amy A. Samford
Amy A. Samford
Executive Vice President and Chief Financial Officer
/s/ Amy E. Ruf
Amy E. Ruf
Vice President and Controller
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