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, 2023
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 26, 2023, the registrant had 12,313,757 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, 2022 and September 30, 2023 (unaudited)
- 3 -
Condensed Consolidated Statements of Income and Comprehensive Income (unaudited) – Three and nine months ended September 30, 2022 and 2023
- 4 -
Condensed Consolidated Statements of Stockholders’ Equity (unaudited) – Three and nine months ended September 30, 2022 and 2023
- 5 -
Condensed Consolidated Statements of Cash Flows (unaudited) – Nine months ended September 30, 2022 and 2023
- 6 -
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
- 17 -
Item 4.
Controls and Procedures
Part II.
OTHER INFORMATION
Item 1A.
Risk Factors
- 18 -
Item 6.
Exhibits
Items 2, 3, 4 and 5 of Part II are omitted because there is no information to report.
- 2 -
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31,
September 30,
ASSETS
2022
2023
(unaudited)
Current assets:
Cash and cash equivalents
$
26,748
17,595
Marketable securities
33,147
46,774
Accounts receivable, net
17,840
19,735
Inventories, net
31,290
34,282
Prepaid expenses and other
2,136
2,152
Total current assets
111,161
120,538
Other assets:
Note receivable from affiliate
13,200
12,000
Goodwill
23,742
Other noncurrent assets
590
738
Total other assets
37,532
36,480
Property and equipment:
Land
5,390
Buildings
23,181
Equipment
74,113
74,486
Construction in progress
722
512
103,406
103,569
Less accumulated depreciation
74,712
77,347
Net property and equipment
28,694
26,222
Total assets
177,387
183,240
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities
15,618
15,047
Income taxes payable to affiliate
1,035
1,351
Total current liabilities
16,653
16,398
Noncurrent liabilities:
Deferred income taxes
2,230
1,651
Other
68
43
Total noncurrent liabilities
2,298
1,694
Stockholders' equity:
Preferred stock
—
123
Additional paid-in capital
53,155
53,275
Retained earnings
105,175
111,839
Accumulated other comprehensive loss - unrealized loss on marketable securities
(17)
(89)
Total stockholders' equity
158,436
165,148
Total liabilities and stockholders’ equity
Commitments and contingencies (Note 1)
See accompanying Notes to Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share data)
Three months ended
Nine months ended
Net sales
42,864
40,355
126,589
118,122
Cost of sales
30,928
27,736
88,944
82,526
Gross margin
11,936
12,619
37,645
35,596
Selling, general and administrative expense
6,016
6,074
17,674
17,644
Operating income
5,920
6,545
19,971
17,952
Interest income
558
1,064
1,109
3,003
Income before income taxes
6,478
7,609
21,080
20,955
Provision for income taxes
1,528
1,852
4,970
5,058
Net income
4,950
5,757
16,110
15,897
Other comprehensive gain (loss), marketable securities adjustment:
Unrealized gain (loss) arising during year, net
30
(72)
Comprehensive income
5,787
15,825
Basic and diluted net income per common share
.40
.47
1.30
1.29
Basic and diluted weighted average shares outstanding
12,307
12,314
12,352
12,310
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Three months ended September 30, 2022 and 2023 (unaudited)
Accumulated
Class A
Additional
other
Total
common
paid-in
Retained
comprehensive
Treasury
stockholders'
stock
capital
earnings
loss
equity
Balance at June 30, 2022
123,155
176,433
Cash dividends ($2.00 per share)
(24,614)
Balance at September 30, 2022
103,491
156,769
Balance at June 30, 2023
109,160
(119)
162,439
Cash dividends ($.25 per share)
(3,078)
Other comprehensive income
Balance at September 30, 2023
Nine months ended September 30, 2022 and 2023 (unaudited)
Balance at December 31, 2021
124
54,780
118,184
173,088
Issuance of common stock
118
Treasury stock:
Acquired
(1,744)
Retired
(1)
(1,743)
1,744
Cash dividends ($2.50 per share)
(30,803)
Balance at December 31, 2022
120
Cash dividends ($.75 per share)
(9,233)
Other comprehensive loss
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Depreciation and amortization
2,962
2,996
(742)
(556)
Noncash interest income
(1,397)
Other, net
287
332
Change in assets and liabilities:
(3,634)
(1,900)
(7,846)
(3,199)
1,454
(526)
Accounts with affiliates
(347)
316
Prepaids and other, net
(122)
(194)
Net cash provided by operating activities
8,122
11,769
Cash flows from investing activities:
Capital expenditures
(3,008)
(564)
Marketable securities:
Purchases
(36,325)
Proceeds from maturities
131
24,000
Note receivable from affiliate:
Collections
21,100
21,900
Advances
(17,100)
(20,700)
Net cash provided by (used in) investing activities
1,123
(11,689)
Cash flows from financing activities:
Dividends paid
Treasury stock acquired
Net cash used in financing activities
(32,547)
Cash and cash equivalents - net change from:
Operating, investing and financing activities
(23,302)
(9,153)
Balance at beginning of period
76,579
Balance at end of period
53,277
Supplemental disclosures -
Cash paid for income taxes
6,080
5,315
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
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, 2023. At September 30, 2023, 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 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, 2023 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, 2022 that we filed with the Securities and Exchange Commission (“SEC”) on March 1, 2023 (the “2022 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, 2022 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, 2022) 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, 2023 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 2022 Consolidated Financial Statements contained in our 2022 Annual Report.
Our operations are reported on a 52 or 53-week year. For presentation purposes, annual and quarterly information in the Condensed Consolidated Financial Statements and accompanying notes are presented as ended September 30, 2022, December 31, 2022 and September 30, 2023. The actual dates of our annual and quarterly periods are October 2, 2022, January 1, 2023 and October 1, 2023, 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
28,493
31,376
86,911
84,390
Marine Components
14,371
8,979
39,678
33,732
Total net sales
Operating income:
4,904
6,496
17,645
16,009
2,716
1,693
7,449
6,953
Corporate operating expenses
(1,700)
(1,644)
(5,123)
(5,010)
Total operating income
Intersegment sales are not material.
n
Note 3 – Marketable securities:
Amortized
Unrealized
Market value
cost basis
loss, net
December 31, 2022:
Current assets
33,164
September 30, 2023:
46,886
(112)
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:
Accounts receivable, net:
13,767
16,531
4,143
3,274
Allowance for doubtful accounts
(70)
Total accounts receivable, net
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Note 5 – Inventories, net:
Raw materials:
4,172
3,464
2,073
2,109
Total raw materials
6,245
5,573
Work-in-process:
14,193
17,476
5,790
5,562
Total work-in-process
19,983
23,038
Finished goods:
3,163
3,233
1,899
2,438
Total finished goods
5,062
5,671
Total inventories, net
Note 6 – Accounts payable and accrued liabilities:
Accounts payable:
2,663
3,156
874
835
Accrued liabilities:
Employee benefits
10,489
8,703
Taxes other than on income
279
489
Insurance
255
264
Deferred revenue
243
574
Customer tooling
135
199
Advances from customers
298
440
382
387
Total accounts payable and accrued liabilities
Note 7 – Provision for income taxes:
Expected tax expense, at the U.S. federal statutory income tax rate of 21%
1,361
1,598
4,427
4,401
State income taxes
194
230
633
631
FDII benefit
(34)
(106)
(57)
7
41
16
83
Total provision for income taxes
Comprehensive provision for income taxes allocable to:
Other comprehensive income (loss) - marketable securities
8
(23)
1,860
5,035
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Note 8 – 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.
We made no treasury purchases during the first nine months of 2023. 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. At September 30, 2023, 523,647 shares were available for purchase under prior repurchase authorizations.
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, 2022
Carrying
Fair
amount
value
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, 2024. Loans made to Valhi at any time under the agreement are at our discretion. At September 30, 2023, the outstanding principal balance receivable from Valhi under the promissory note was $12.0 million. Interest income (including unused commitment fees) on our loan to Valhi was $.7 million and $.9 million for the nine months ended September 30, 2022 and 2023, 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 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:
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 2023 operating income increased to $6.6 million compared to $5.9 million in the third quarter of 2022. The increase in operating income in the third quarter of 2023 compared to 2022 is due to higher Security Products sales and improved gross margin percentages at both segments, partially offset by lower Marine Components sales. Operating income for the first nine months of 2023 was $18.0 million compared to $20.0 million in the first nine months of 2022. The decrease in operating income in the first nine months of 2023 compared to 2022 is primarily due to lower Marine Components sales and, to a lesser extent, lower Security Products sales somewhat offset by an improvement in Marine Components gross margin percentage.
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
72.2
68.7
27.8
31.3
Operating costs and expenses
14.0
15.1
13.8
16.2
70.3
69.9
29.7
30.1
13.9
14.9
15.8
15.2
Net sales. Net sales decreased $2.6 million and $8.5 million in the third quarter and in the first nine months of 2023, respectively, compared to the same periods in 2022 due to lower Marine Components sales primarily to the towboat market, partially offset by higher Security Products sales in the third quarter of 2023. See segment discussion below.
Cost of sales and gross margin. Cost of sales as a percentage of sales decreased 3.5% and .4% in the third quarter and for the first nine months of 2023, respectively, compared to the same periods in 2022. As a result, gross margin as a percentage of sales increased over the same periods. Gross margin percentage increased in the third quarter and for the first nine months of 2023 compared to the same periods in 2022 primarily due to higher gross margin percentages at both Security Products and Marine Components for the third quarter of 2023. Higher gross margin percentage at Marine
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Components in the first quarter of 2023 also favorably impacted 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 for the first nine months of 2023 were comparable to the same periods in 2022. Operating costs and expenses as a percentage of net sales increased for the third quarter and the first nine months of 2023 due to decreased coverage of operating costs and expenses as a result of lower sales.
Operating income. As a percentage of net sales, operating income comparisons for the third quarter and first nine months compared to the same periods of 2022 were primarily impacted by the factors impacting sales, cost of sales, gross margin and operating costs. See segment discussion below.
Interest income. Interest income increased $.5 million and $1.9 million in the third quarter and for the first nine months of 2023, respectively, compared to the same periods in 2022 primarily due to higher average interest rates and increased 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
The key performance indicator for our segments is operating income.
Change
Security Products:
10
(3)
20,241
21,347
5
59,629
58,475
(2)
8,252
10,029
22
27,282
25,915
(5)
3,348
3,533
6
9,637
9,906
3
32
(9)
29.0
32.0
31.4
30.7
Operating income margin
17.2
20.7
20.3
19.0
Security Products. Security Products net sales increased 10% in the third quarter of 2023 compared to the same period in 2022. Relative to prior year, third quarter sales were $3.9 million higher to the government security market, partially offset by $.6 million lower sales to the office furniture market and $.4 million lower sales to the gas station security market. Security Products net sales decreased 3% in the first nine months of 2023 compared to the same period in 2022. Relative to prior year, sales for the first nine months were $1.4 million lower to the office furniture market, $1.1 million lower to the government security market, $.5 million lower to the gas station security market and $.4 million lower to the healthcare market, partially offset by $1.2 million higher sales to distributors.
Gross margin as a percentage of net sales increased for the third quarter of 2023 compared to the same period in 2022 primarily due to increased sales volumes and lower cost of sales percentage as a result of lower raw materials, shipping and overtime costs. Operating income as a percentage of net sales increased in the third quarter of 2023 compared to the same period in 2022 due to the factors impacting gross margin, partially offset by increased operating costs and expenses, including higher employee salaries and benefits of $.2 million. Gross margin as a percentage of net sales for the first nine months of 2023 decreased as compared to the same period in 2022 primarily due to effects of lower sales and decreased coverage of fixed costs as a result of lower sales, partially offset by the favorable increase in gross margin during
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the third quarter as discussed above. Operating income as a percentage of net sales decreased in the first nine months of 2023 compared to the same period in 2022 due to the factors impacting gross margin, as well as increased operating costs and expenses including higher employee salaries and benefits of $.2 million noted above.
Marine Components:
(38)
(15)
10,687
6,389
(40)
29,315
24,051
(18)
3,684
2,590
(30)
10,363
9,681
(7)
968
897
2,914
2,728
(6)
25.6
28.8
26.1
28.7
18.9
18.8
20.6
Marine Components. Marine Components net sales decreased 38% in the third quarter of 2023 compared to the same period in 2022. Relative to prior year, third quarter sales were $4.8 million lower to the towboat market and $.5 million lower to the engine builder market, partially offset by $.4 million higher sales to the center console boat market. Marine Components net sales decreased 15% in the first nine months of 2023 compared to the same period in 2022. Relative to prior year, sales for the first nine months were $7.7 million lower to the towboat market and $.8 million lower to the engine builder market, partially offset by $1.4 million higher sales to the industrial market, $.6 million higher sales to marine dealers and distributors and $.4 million higher sales to the center console boat market.
Gross margin as a percentage of sales increased in the third quarter and for the first nine months of 2023 compared to the same period in 2022 primarily due to lower raw material costs (primarily stainless steel and aluminum), lower shipping rates and lower labor costs from reduced employee overtime due to lower sales, partially offset by decreased coverage of fixed costs as a result of lower sales. Higher gross margin in the first quarter of 2023 also favorably impacted the nine-month comparative period. Operating income as a percentage of net sales in the third quarter of 2023 was comparable to the same period in 2022. Operating income as a percentage of net sales increased in the first nine months of 2023 compared to the same period in 2022 due to the factors impacting gross margin as well as reduced operating costs and expenses, including lower employee related administrative expenses of $.2 million.
Outlook. During the third quarter, we benefited from increased sales to a customer in the government security market while demand in many of the other markets Security Products serves remained sluggish. At Marine Components, softening demand experienced in the first half of the year continued in the third quarter, primarily due to continued weakness in the towboat market. Labor markets have largely become favorable in each of the regions we operate, and material prices have either stabilized or, in the case of certain commodity raw materials, started to decline slightly. Our supply chains are stable and transportation and logistical delays are minimal, and the long lead times related to certain electronic and specialty components we previously experienced have begun to ease. We have adjusted our labor force and production rates at our facilities to reflect the stability of our raw material supplies and near-term demand levels.
We expect Security Products will continue to benefit from increased sales to the government security market for the remainder of the year. We are in close contact with our key customers and believe reduced order rates will continue through the end of the year in many of the other Security Products markets. Overall, we expect the improved gross margins experienced by Security Products during the third quarter will continue in the fourth quarter as raw material costs have stabilized and higher cost inventory has worked its way through cost of sales. We expect Marine Components net sales for the remainder of the year will continue to be challenged compared to 2022, particularly in the towboat market, as marine demand faces strong headwinds due to higher interest rates and broader market weakness. Several original equipment boat manufacturers, including certain of our customers, have publicly announced reductions to production schedules for the remainder of 2023. We have been able to somewhat offset the towboat market sales declines with increased sales to industrial customers, but we do not expect increases in sales to the industrial market will fully offset weakened towboat demand. Overall, we expect Marine Components gross margin as a percentage of net sales for the full year of 2023 to be slightly favorable to 2022 primarily as a result of lower raw material costs. Despite increased sales to the government security market and higher gross margin percentage at both segments, due to broader market reduced demand, we expect
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to report slightly lower consolidated sales and operating income in 2023 compared to 2022. On the strength of higher interest income, we expect net income for the full year 2023 to be comparable to prior year. We are focused on managing inventory levels to align with anticipated near-term demand. With raw materials and other components more readily available, we believe we will be able to achieve additional operating efficiencies during the remainder of the year although the extent and impact of such efficiencies is not yet known.
Our expectations for our operations and the markets we serve are based on a number of factors outside our control. As noted above, we have experienced some 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, the impact of economic conditions and geopolitical events on demand for our products or our customers’ and suppliers’ operations, 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 2023 increased by $3.6 million as compared to the first nine months of 2022. The increase in net cash provided is primarily due to the net effects of:
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, 2022 to September 30, 2023 varied by segment primarily as a result of relative changes in the timing of sales and collections relative to the end of the quarter. For comparative purposes, we have provided December 31, 2021 and September 30, 2022 numbers below.
Days Sales Outstanding:
2021
46 Days
45 Days
48 Days
30 Days
32 Days
33 Days
Consolidated CompX
42 Days
41 Days
Our average number of days in inventory increased from December 31, 2022 to September 30, 2023 primarily due to the increase at Marine Components due to lower sales and increased inventory balances as a result of prior orders of certain raw materials that had longer lead times that were delivered during the second and third quarters of 2023. Days in inventory for Security Products increased slightly due to the planned inventory build during the second quarter at Security Products to fulfill a purchase order that began shipping during the third quarter and is expected to continue shipping through the end of the year. Absent this order, Security Products inventory balances would have declined at the end of the third quarter in line with current demand. For comparative purposes, we have provided December 31, 2021 and September 30, 2022 numbers below.
Days in Inventory:
95 Days
103 Days
101 Days
97 Days
89 Days
144 Days
96 Days
98 Days
99 Days
112 Days
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Investing activities. Our capital expenditures were $.6 million and $3.0 million in the first nine months of 2023 and 2022, respectively. During the first nine months of 2023, Valhi repaid a net $1.2 million under the promissory note ($20.7 million of gross borrowings and $21.9 million of gross repayments). 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). See Note 10 to our Condensed Consolidated Financial Statements.
During the first nine months of 2023, we had gross purchases of U.S. treasury marketable securities aggregating $36.3 million and received gross proceeds totaling $24.0 million related to U.S. treasury bill maturities. See Note 3 to our Condensed Consolidated Financial Statements.
Financing activities. During the first nine months of 2023 and 2022, we paid aggregate quarterly dividends to CompX stockholders of $.75 per share. Additionally, in August 2022 our board of directors declared a special dividend on our Class A common stock of $1.75 per share ($21.5 million). 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. See Note 8 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 10 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 $64.4 million aggregate cash, cash equivalents and marketable securities at September 30, 2023 were held in the U.S.
Capital expenditures. Firm purchase commitments for capital projects in process at September 30, 2023 totaled $.2 million. We expect our capital expenditures for 2023 will be approximately $2.0 million primarily to meet our existing customer demand and those required to properly maintain our facilities and technology infrastructure.
Stock repurchase program. At September 30, 2023, we have 523,647 shares available for repurchase under a stock repurchase program authorized by our board of directors. See Note 8 to our Condensed Consolidated Financial Statements.
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Commitments and contingencies. There have been no material changes in our contractual obligations since we filed our 2022 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 2023 with respect to our critical accounting policies presented in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2022 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 2022 Annual Report, and we refer you to Part I, Item 7A – “Quantitative and Qualitative Disclosure About Market Risk” in our 2022 Annual Report. See also Note 9 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, 2023. 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, 2023 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 2022 Annual Report for a discussion of risk factors related to our businesses.
ITEM 6.Exhibits.
Item No.
Exhibit Index
3.1
Amended and Restated Bylaws of CompX International Inc. (effective November 1, 2023) – incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K filed on November 1, 2023.
31.1
Certification
31.2
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
104
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 1, 2023
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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