10-Q 1 cix-10q_20180331.htm 10-Q cix-10q_20180331.htm

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarter ended March 31, 2018

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,

Three Lincoln Centre, Dallas, Texas

 

75240-2620

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code (972) 448-1400

Indicate by checkmark:

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 (or for such a shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes      No  

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    (Do not check if a smaller reporting company)  

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.  

Whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  .

Number of shares of common stock outstanding on May 2, 2018:

Class A: 2,426,107     Class B: 10,000,000

 

 


COMPX INTERNATIONAL INC.

Index

 

Part I.

  

FINANCIAL INFORMATION

Page

Item 1.

  

Financial Statements

 

 

 

  

 

Condensed Consolidated Balance Sheets – December 31, 2017 and March 31, 2018 (unaudited)

  - 3 -

 

 

  

 

Condensed Consolidated Statements of Income (unaudited) – Three months ended March 31, 2017 and 2018

  - 4 -

 

 

  

 

Condensed Consolidated Statements of Cash Flows (unaudited) - Three months ended March 31, 2017 and 2018

  - 5 -

 

 

  

 

Condensed Consolidated Statement of Stockholders’ Equity (unaudited) – Three months ended March 31, 2018

  - 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

   - 16 -

 

Item 4.

  

 

Controls and Procedures

   - 16 -

 

Part II.

  

 

OTHER INFORMATION

 

 

Item 1A.

  

 

Risk Factors

   - 18 -

 

Item 6.

  

 

Exhibits

   - 18 -

 

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

 

 

 

 

- 2 -


 

COMPX INTERNATIONAL INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 

December 31,

 

 

March 31,

 

 

2017

 

 

2018

 

ASSETS

 

 

 

 

(unaudited)

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

29,655

 

 

$

28,353

 

Accounts receivable, net

 

10,446

 

 

 

12,673

 

Inventories, net

 

15,382

 

 

 

16,328

 

Prepaid expenses and other

 

879

 

 

 

739

 

Total current assets

 

56,362

 

 

 

58,093

 

Other assets:

 

 

 

 

 

 

 

Note receivable from affiliate

 

38,200

 

 

 

38,000

 

Goodwill

 

23,742

 

 

 

23,742

 

Other noncurrent

 

590

 

 

 

590

 

Total other assets

 

62,532

 

 

 

62,332

 

Property and equipment:

 

 

 

 

 

 

 

Land

 

4,935

 

 

 

4,935

 

Buildings

 

22,774

 

 

 

22,774

 

Equipment

 

67,373

 

 

 

67,712

 

Construction in progress

 

569

 

 

 

850

 

 

 

95,651

 

 

 

96,271

 

Less accumulated depreciation

 

63,586

 

 

 

64,385

 

Net property and equipment

 

32,065

 

 

 

31,886

 

Total assets

$

150,959

 

 

$

152,311

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

$

10,792

 

 

$

8,430

 

Income taxes payable to affiliates

 

470

 

 

 

923

 

Total current liabilities

 

11,262

 

 

 

9,353

 

Noncurrent liabilities -

 

 

 

 

 

 

 

Deferred income taxes

 

3,112

 

 

 

3,268

 

Stockholders' equity:

 

 

 

 

 

 

 

Preferred stock

 

 

 

 

 

Class A common stock

 

24

 

 

 

24

 

Class B common stock

 

100

 

 

 

100

 

Additional paid-in capital

 

55,612

 

 

 

55,612

 

Retained earnings

 

80,849

 

 

 

83,954

 

Total stockholders' equity

 

136,585

 

 

 

139,690

 

Total liabilities and stockholders’ equity

$

150,959

 

 

$

152,311

 

 

Commitments and contingencies (Note 1)

See accompanying Notes to Condensed Consolidated Financial Statements.

 

- 3 -


COMPX INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

 

Three months ended

 

 

March 31,

 

 

2017

 

 

2018

 

 

(unaudited)

 

Net sales

$

29,948

 

 

$

28,413

 

Cost of goods sold

 

20,262

 

 

 

18,910

 

Gross profit

 

9,686

 

 

 

9,503

 

Selling, general and administrative expense

 

5,162

 

 

 

5,130

 

Operating income

 

4,524

 

 

 

4,373

 

Interest income

 

335

 

 

 

572

 

Income before taxes

 

4,859

 

 

 

4,945

 

Provision for income taxes

 

1,708

 

 

 

1,219

 

Net income

$

3,151

 

 

$

3,726

 

 

 

 

 

 

 

 

 

Basic and diluted net income per common share

$

0.25

 

 

$

0.30

 

 

 

 

 

 

 

 

 

Cash dividends per share

$

0.05

 

 

$

0.05

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average shares outstanding

 

12,419

 

 

 

12,426

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

- 4 -


COMPX INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

Three months ended

 

 

March 31,

 

 

2017

 

 

2018

 

 

(unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

$

3,151

 

 

$

3,726

 

Depreciation and amortization

 

915

 

 

 

878

 

Deferred income taxes

 

37

 

 

 

157

 

Other, net

 

14

 

 

 

42

 

Change in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable, net

 

(2,644

)

 

 

(2,235

)

Inventories, net

 

(381

)

 

 

(980

)

Accounts payable and accrued liabilities

 

(2,303

)

 

 

(2,418

)

Accounts with affiliates

 

1,079

 

 

 

453

 

Prepaids and other, net

 

(78

)

 

 

140

 

Net cash used in operating activities

 

(210

)

 

 

(237

)

Cash flows from investing activities:

 

 

 

 

 

 

 

Capital expenditures

 

(609

)

 

 

(644

)

Note receivable from affiliate:

 

 

 

 

 

 

 

Collections

 

12,500

 

 

 

12,600

 

Advances

 

(14,100

)

 

 

(12,400

)

Net cash used in investing activities

 

(2,209

)

 

 

(444

)

Cash flows from financing activities -

 

 

 

 

 

 

 

Dividends paid

 

(621

)

 

 

(621

)

Cash and cash equivalents - net change from:

 

 

 

 

 

 

 

Operating, investing and financing activities

 

(3,040

)

 

 

(1,302

)

Balance at beginning of period

 

33,153

 

 

 

29,655

 

Balance at end of period

$

30,113

 

 

$

28,353

 

Supplemental disclosures -

 

 

 

 

 

 

 

Cash paid for income taxes

$

585

 

 

$

602

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

- 5 -


COMPX INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

Three months ended March 31, 2018

(In thousands)

(unaudited)

 

 

 

 

Additional

 

 

 

 

 

 

Total

 

 

Common stock

 

 

paid-in

 

 

Retained

 

 

stockholders'

 

 

Class A

 

 

Class B

 

 

capital

 

 

earnings

 

 

equity

 

Balance at December 31, 2017

$

24

 

 

$

100

 

 

$

55,612

 

 

$

80,849

 

 

$

136,585

 

Net income

 

 

 

 

 

 

 

 

 

 

3,726

 

 

 

3,726

 

Cash dividends

 

 

 

 

 

 

 

 

 

 

(621

)

 

 

(621

)

Balance at March 31, 2018

$

24

 

 

$

100

 

 

$

55,612

 

 

$

83,954

 

 

$

139,690

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

- 6 -


COMPX INTERNATIONAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

(unaudited)

 

Note 1 – Organization and basis of presentation:

Organization. We (NYSE American: CIX) are 87% owned by NL Industries, Inc. (NYSE: NL) at March 31, 2018.  We manufacture and sell component products (security products and recreational marine components).  At March 31, 2018, Valhi, Inc. (NYSE: VHI) owns 83% of NL’s outstanding common stock and a wholly-owned subsidiary of Contran Corporation owns 93% of Valhi’s outstanding common stock.  All of Contran’s outstanding voting stock is held by a family trust established for the benefit of Lisa K. Simmons and Serena Simmons Connelly and their children, for which Ms. Simmons and Ms. Connelly are co-trustees, or is held directly by Ms. Simmons and Ms. Connelly or entities related to them.  Consequently, Ms. Simmons and Ms. Connelly may be deemed to control 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, 2017 that we filed with the Securities and Exchange Commission (“SEC”) on February 28, 2018 (the “2017 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, 2017 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, 2017) 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 period ended March 31, 2018 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 2017 Consolidated Financial Statements contained in our 2017 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 March 31, 2017, December 31, 2017 and March 31, 2018.  The actual dates of our annual and quarterly periods are April 2, 2017, December 31, 2017 and April 1, 2018, 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:

 

 

Three months ended

 

 

March 31,

 

 

2017

 

 

2018

 

 

(In thousands)

 

Net sales:

 

 

 

 

 

 

 

Security Products

$

26,010

 

 

$

24,056

 

Marine Components

 

3,938

 

 

 

4,357

 

Total net sales

$

29,948

 

 

$

28,413

 

 

 

 

 

 

 

 

 

Operating income (loss):

 

 

 

 

 

 

 

Security Products

$

5,691

 

 

$

5,612

 

Marine Components

 

371

 

 

 

586

 

Corporate operating expenses

 

(1,538

)

 

 

(1,825

)

Total operating income

 

4,524

 

 

 

4,373

 

Interest income

 

335

 

 

 

572

 

Income before taxes

$

4,859

 

 

$

4,945

 

 

Intersegment sales are not material.

 

- 7 -


Note 3 – Accounts receivable, net:

 

 

December 31,

 

 

March 31,

 

 

2017

 

 

2018

 

 

(In thousands)

 

Accounts receivable, net:

 

 

 

 

 

 

 

Security Products

$

9,341

 

 

$

10,836

 

Marine Components

 

1,175

 

 

 

1,909

 

Allowance for doubtful accounts

 

(70

)

 

 

(72

)

Total accounts receivable, net

$

10,446

 

 

$

12,673

 

 

 

Note 4 – Inventories, net:

 

 

December 31,

 

 

March 31,

 

 

2017

 

 

2018

 

 

(In thousands)

 

Raw materials:

 

 

 

 

 

 

 

Security Products

$

2,156

 

 

$

2,174

 

Marine Components

 

574

 

 

 

596

 

Total raw materials

 

2,730

 

 

 

2,770

 

Work-in-process:

 

 

 

 

 

 

 

Security Products

 

8,290

 

 

 

8,954

 

Marine Components

 

1,546

 

 

 

1,713

 

Total work-in-process

 

9,836

 

 

 

10,667

 

Finished goods:

 

 

 

 

 

 

 

Security Products

 

2,079

 

 

 

2,148

 

Marine Components

 

737

 

 

 

743

 

Total finished goods

 

2,816

 

 

 

2,891

 

Total inventories, net

$

15,382

 

 

$

16,328

 

 

Note 5 – Accounts payable and accrued liabilities:

 

 

December 31,

 

 

March 31,

 

 

2017

 

 

2018

 

 

(In thousands)

 

Accounts payable:

 

 

 

 

 

 

 

Security Products

$

1,897

 

 

$

2,275

 

Marine Components

 

375

 

 

$

494

 

Accrued liabilities:

 

 

 

 

 

 

 

Employee benefits

 

7,413

 

 

 

4,008

 

Customer tooling

 

290

 

 

 

319

 

Taxes other than on income

 

289

 

 

 

504

 

Other

 

528

 

 

 

830

 

Total accounts payable and accrued liabilities

$

10,792

 

 

$

8,430

 

 

 

Note 6 – Revenue Recognition

 

Our sales involve single performance obligations to ship our products pursuant to customer purchase orders.  In some cases, the purchase order is supported by an underlying master sales agreement, but our purchase order verification notice generally evidences the contract with our customer by specifying the key terms of product and quantity ordered, price and delivery and payment terms. Effective January 1, 2018 with the adoption of Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606)(see Note 10), we record revenue when we satisfy our performance obligations to our customers by transferring control of our products to them, which generally occurs at point of shipment or upon delivery.  Such transfer of control is also evidenced by transfer of legal title and other risks and rewards of ownership (giving the customer the ability to direct the use of, and obtain substantially all of the benefits of, the product), and our customers becoming obligated to pay us and such payment being probable of occurring.  In certain arrangements we provide shipping and handling activities after the transfer of control to our

- 8 -


customer (e.g. when control transfers prior to delivery). In such arrangements shipping and handling are considered fulfillment activities, and accordingly, such costs are accrued when the related revenue is recognized.

 

Revenue is recorded in an amount that reflects the net consideration we expect to receive in exchange for our products.  Prices for our products are based on terms specified in published list prices and purchase orders, which generally do not include financing components, noncash consideration or consideration paid to our customers.  As our standard payment terms are less than one year, we have elected the practical expedient under ASC 606 and we have not assessed whether a contract has a significant financing component. We state sales net of price, early payment and distributor discounts as well as volume rebates (collectively, variable consideration).   Variable consideration, to the extent present, is not material and is recognized as the amount to which we are most-likely to be entitled, using all information (historical, current and forecasted) that is reasonably available to us, and only to the extent that a significant reversal in the amount of the cumulative revenue recognized is not probable of occurring in a future period.   Differences, if any, between estimates of the amount of variable consideration to which we will be entitled and the actual amount of such variable consideration have not been material in the past. We report any tax assessed by a governmental authority that we collect from our customers that is both imposed on and concurrent with our revenue-producing activities (such as sales, use, value added and excise taxes) on a net basis (meaning we do not recognize these taxes either in our revenues or in our costs and expenses).

 

Frequently, we receive orders for products to be delivered over dates that may extend across reporting periods. We invoice for each delivery upon shipment and recognize revenue for each distinct shipment when all sales recognition criteria for that shipment have been satisfied. As scheduled delivery dates for these orders are within a one year period, under the optional exemption provided by ASC 606, we do not disclose sales allocated to future shipments of partially completed contracts.

 

ASU 2014-09 requires a disaggregation of our sales into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.  We have determined such disaggregation of our sales is the same as the disclosure of our sales by segment.  See Note 2.

 

Note 7 – Provision for income taxes:

 

 

Three months ended

 

 

March 31,

 

 

2017

 

 

2018

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

Expected tax expense, at the U.S. federal statutory

   income tax rate of 35% in 2017 and 21% in 2018

$

1,701

 

 

$

1,038

 

Domestic production activities deduction

 

(145

)

 

 

-

 

State income taxes

 

132

 

 

 

172

 

Other, net

 

20

 

 

 

9

 

Total income tax expense

$

1,708

 

 

$

1,219

 

 

As discussed in the 2017 Annual Report, on December 22, 2017, H.R.1, formally known as the “Tax Cuts and Jobs Act” (“2017 Tax Act”) was enacted into law. This new tax legislation, among other changes, reduced the U.S. Federal corporate income tax rate from 35% to 21% effective January 1, 2018.  Following the enactment of the 2017 Tax Act, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) 118 to provide guidance on the accounting and reporting impacts of the 2017 Tax Act.  SAB 118 states that companies should account for changes related to the 2017 Tax Act in the period of enactment if all information is available and the accounting can be completed. In situations where companies do not have enough information to complete the accounting in the period of enactment, a company must either 1) record an estimated provisional amount if the impact of the change can be reasonably estimated; or 2) continue to apply the accounting guidance that was in effect immediately prior to the 2017 Tax Act if the impact of the change cannot be reasonably estimated.  If estimated provisional amounts are recorded, SAB 118 provides a measurement period of no longer than one year during which companies should adjust those amounts as additional information becomes available.

 

Under GAAP, we are required to revalue our net deferred tax liability associated with our U.S. net taxable temporary differences in the period in which the new tax legislation is enacted based on deferred tax balances as of the enactment date, to reflect the effect of such reduction in the corporate income tax rate.  Our temporary differences as of December 31, 2017 were not materially different from our temporary differences as of the enactment date, accordingly revaluation of our net taxable temporary differences was based on our net deferred tax liability as of December 31, 2017. Such revaluation resulted in a non-cash deferred income tax benefit of $1.9 million recognized as of December 31, 2017 in continuing operations, reducing our net deferred income tax liability.   The new tax legislation also eliminated the domestic production activities deduction beginning in 2018 and allows for the expensing of certain capital expenditures for assets placed in service between September 28, 2017 and December 31, 2022.  The amounts recorded as of December 31, 2017 as a result of the 2017 Tax Act represent estimates based on information currently available. We

- 9 -


have not made any additional measurement-period adjustments to the provisional amounts recorded for this item during the first quarter of 2018 because we are still waiting on additional guidance that may impact the income tax effects of the new legislation recognized at December 31, 2017. We will complete our accounting for this item within the prescribed measurement period ending December 22, 2018, pursuant to the guidance under SAB 118, and if we determine an adjustment to the provisional amount recognized at December 31, 2017 is required, we will recognize such adjustment in the reporting period within the SAB 118 measurement period in which such adjustment is determined.

 

 

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,

 

 

March 31,

 

 

2017

 

 

2018

 

 

Carrying

 

 

Fair

 

 

Carrying

 

 

Fair

 

 

amount

 

 

value

 

 

amount

 

 

value

 

 

(In thousands)

 

Cash and cash equivalents

$

29,655

 

 

$

29,655

 

 

$

28,353

 

 

$

28,353

 

Accounts receivable, net

 

10,446

 

 

 

10,446

 

 

 

12,673

 

 

 

12,673

 

Accounts payable

 

2,272

 

 

 

2,272

 

 

 

2,769

 

 

 

2,769

 

 

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 whereby we agreed to loan Valhi up to $40 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, 2019. Loans made to Valhi at any time under the agreement are at our discretion.  At March 31, 2018, the outstanding principal balance receivable from Valhi under the promissory note was $38.0 million. Interest income (including unused commitment fees) on our loan to Valhi was $0.3 million and $0.5 million for the three months ended March 31, 2017 and 2018, respectively.

 

Note 10 – Recent accounting pronouncements:

Adopted

On January 1, 2018, we adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) for all contracts which were not completed as of January 1, 2018 using the modified retrospective method.  Prior to adoption of this standard, we recorded sales when our products were shipped and title and other risks and rewards of ownership had passed to our customer, which was generally at the time of shipment (although in some instances shipping terms were FOB destination point, for which we did not recognize revenue until the product was received by our customer).  Following adoption of this standard, we record sales when we satisfy our performance obligations to our customers by transferring control of our products to them, which we have determined is at the same point in time that we recognized revenue prior to adoption of this new standard. Accordingly, the adoption of Topic 606 as of January 1, 2018 did not have a material impact on our consolidated financial statements, and we believe adoption of this standard will have a minimal effect on our revenues on an ongoing basis.  See Note 6.  

 


- 10 -


Pending Adoption

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which is a comprehensive rewriting of the lease accounting guidance which aims to increase comparability and transparency with regard to lease transactions.   The primary change will be the recognition of lease assets for the right-of–use of the underlying asset and lease liabilities for the obligation to make payments by lessees on the balance sheet for leases currently classified as operating leases.   The ASU also requires increased qualitative disclosure about leases in addition to quantitative disclosures currently required.  Companies are required to use a modified retrospective approach to adoption with a practical expedient which will allow companies to continue to account for existing leases under the prior guidance unless a lease is modified, other than the requirement to recognize the right-of-use asset and lease liability for all operating leases. The changes indicated above will be effective for us beginning in the first quarter of 2019, with early adoption permitted. We have not yet evaluated the effect this ASU will have on our Consolidated Financial Statements, but given the amount of our future minimum payments under non-cancellable operating leases at December 31, 2017 totaling $0.4 million, we do not expect the adoption of this standard to have a material effect on our Consolidated Balance Sheet.

 

 

 

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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 electronic 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 and trim tabs 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 product features,

 

Future litigation,

 

Potential difficulties in integrating future acquisitions,

 

Decisions to sell operating assets other than in the ordinary course of business,

 

Environmental matters (such as those requiring emission and discharge standards for existing and new facilities),

 

The ultimate outcome of income tax audits, tax settlement initiatives or other tax matters, including future tax reform,

 

The impact of current or future government regulations (including employee healthcare benefit related regulations),

 

General global economic and political conditions that introduce instability into the U.S. economy (such as changes in the level of gross domestic product in various regions of the world),

 

Operating interruptions (including, but not limited to labor disputes, hazardous chemical leaks, natural disasters, fires, explosions, unscheduled or unplanned downtime, transportation interruptions and cyber-attacks); 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.

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Operations Overview

We reported operating income of $4.4 million in the first quarter of 2018 compared to $4.5 million in the same period of 2017.  The decrease in operating income from 2017 to 2018 primarily resulted from lower Security Products sales.

Our product offerings consist of a significantly 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 goods sold and gross profit.  In addition, small variations in period-to-period net sales, cost of goods sold and gross profit can result from changes in the relative mix of our products sold.

 

Results of Operations

 

 

Three months ended

 

 

March 31,

 

 

2017

 

 

%

 

 

2018

 

 

%

 

 

(Dollars in thousands)

 

Net sales

$

29,948

 

 

 

100.0

%

 

$

28,413

 

 

 

100.0

%

Cost of goods sold

 

20,262

 

 

 

67.7

%

 

 

18,910

 

 

 

66.6

%

Gross profit

 

9,686

 

 

 

32.3

%

 

 

9,503

 

 

 

33.4

%

Operating costs and expenses

 

5,162

 

 

 

17.2

%

 

 

5,130

 

 

 

18.1

%

Operating income

$

4,524

 

 

 

15.1

%

 

$

4,373

 

 

 

15.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales. Net sales decreased $1.5 million in the first quarter of 2018 compared to the same period of 2017, primarily due to lower Security Products sales volumes to existing government security customers and to a lesser extent lower sales to an original equipment manufacturer of recreational transportation products, partially offset by higher Marine Components sales for the quarter. Relative changes in selling prices did not have a material impact on net sales comparisons.

Cost of goods sold and gross profit. Cost of goods sold as a percentage of sales decreased 1% in the first quarter of 2018 compared to the same period in 2017.  As a result, gross profit as a percentage of sales increased over the same period. The increase in gross profit percentage is due to reduced fixed costs at Security Products, primarily resulting from headcount reductions made in 2017, and manufacturing efficiencies and improved fixed cost leverage at Marine Components. Gross profit dollars decreased due to lower sales at Security Products.

Operating costs and expenses. Operating costs and expenses consist primarily of sales and administrative-related personnel costs, sales commissions and advertising expenses, as well as gains and losses on plant, property and equipment.  Operating costs and expenses for the first quarter of 2018 were comparable to the same period in 2017.

Operating income. As a percentage of net sales, operating income for the first quarter of 2018 was comparable to the same period of 2017 as a result of the factors impacting cost of goods sold, gross margin and operating costs discussed above.

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.  

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Segment Results

The key performance indicator for our segments is operating income.

 

 

Three months ended

 

 

 

 

 

 

March 31,

 

 

 

 

 

 

2017

 

 

2018

 

 

%

Change

 

 

(Dollars in thousands)

 

 

 

 

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

Security Products

$

26,010

 

 

$

24,056

 

 

 

-8

%

Marine Components

 

3,938

 

 

 

4,357

 

 

 

11

%

Total net sales

$

29,948

 

 

$

28,413

 

 

 

-5

%

Gross profit:

 

 

 

 

 

 

 

 

 

 

 

Security Products

$

8,725

 

 

$

8,303

 

 

 

-5

%

Marine Components

 

961

 

 

 

1,201

 

 

 

25

%

Total gross profit

$

9,686

 

 

$

9,504

 

 

 

-2

%

Operating income:

 

 

 

 

 

 

 

 

 

 

 

Security Products

$

5,691

 

 

$

5,612

 

 

 

-1

%

Marine Components

 

371

 

 

 

586

 

 

 

58

%

Corporate operating expenses

 

(1,538

)

 

 

(1,825

)

 

 

-19

%

Total operating income

$

4,524

 

 

$

4,373

 

 

 

-3

%

Gross profit margin:

 

 

 

 

 

 

 

 

 

 

 

Security Products

 

33.5

%

 

 

34.5

%

 

 

 

 

Marine Components

 

24.4

%

 

 

27.6

%

 

 

 

 

Total gross profit margin

 

32.3

%

 

 

33.4

%

 

 

 

 

Operating income margin:

 

 

 

 

 

 

 

 

 

 

 

Security Products

 

21.9

%

 

 

23.3

%

 

 

 

 

Marine Components

 

9.4

%

 

 

13.4

%

 

 

 

 

Total operating income margin

 

15.1

%

 

 

15.4

%

 

 

 

 

 

Security Products. Security Products net sales decreased 8% in the first quarter of 2018 compared to the same period last year. The decrease in sales is primarily due to approximately $1.1 million in lower sales to existing government security customers and $0.3 million in lower sales to a customer serving the recreational transportation market.  Gross profit margin and operating income as a percentage of sales in 2018 increased compared to the same period in 2017 due to lower fixed costs resulting primarily from headcount reductions made in 2017.

Marine Components. Marine Components net sales increased 11% in the first quarter of 2018 as compared to the same period last year, reflecting generally improved demand for products sold to various markets. Gross profit margin and operating income as a percentage of sales in 2018 increased significantly compared to the same period in 2017 primarily due to improved manufacturing efficiencies and greater fixed cost leverage facilitated by higher production volumes.  

Outlook. As expected, first quarter sales did not match the levels achieved in early 2017 due to more normalized demand from existing government customers and lower sales to the transportation market, where a significant customer of the segment continues to experience weakened sales volumes, in 2018. While we expect continued softness in transportation sales, full year sales of security products to existing government customers should be comparable to 2017. We expect consolidated sales for full year 2018 to meet or exceed 2017 based on anticipated growth in sales to other Security Products markets and continued growth in Marine Component sales, where we continue to benefit from innovation and diversification in our product offerings to the recreational boat markets. We will continue to monitor economic conditions and sales order rates and respond to fluctuations in customer demand through continuous evaluation of staffing levels and consistent execution of our lean manufacturing and cost improvement initiatives. Additionally, we continue to seek opportunities to gain market share in markets we currently serve, to expand into new markets and to develop new product features in order to mitigate the impact of changes in demand as well as broaden our sales base.

 


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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.

We generally report a net use of cash from operating activities in the first three months of each year due to seasonal changes in the level of our working capital.  Our net cash used by operating activities was $0.2 million in each of the first three months of 2017 and 2018, respectively.

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, 2017 to March 31, 2018 varied by segment.  Generally, we expect our average days sales outstanding to increase from December to March as the result of seasonally higher sales during the first quarter as compared to the fourth quarter. Overall, our March 31, 2018 days sales outstanding compared to December 31, 2017 is in line with our expectations. For comparative purposes, we have provided December 31, 2016 and March 31, 2017 numbers below.

 

Days Sales Outstanding:

  

December 31, 2016

 

March 31, 2017

 

December 31, 2017

 

March 31, 2018

Security Products

  

36 Days

 

39 Days

 

39 Days

 

41 Days

Marine Components

  

33 Days

 

39 Days

 

31 Days

 

39 Days

Consolidated CompX

  

36 Days

 

39 Days

 

38 Days

 

41 Days

Our average number of days sales in inventory has typically decreased between year-end and the end of the first calendar quarter due to higher seasonal sales in the first quarter. However, average days sales in inventory for Security Products increased from December 31, 2017 to March 31, 2018, despite higher first quarter sales relative to the preceding quarter, due to a build in work-in-process inventories of approximately $0.7 million based on anticipated second quarter customer demand in certain markets. The variability in days in inventory among our segments primarily relates to the differences in the complexity of the production processes and therefore the length of time it takes to produce and sell end-products.  For comparative purposes, we have provided December 31, 2016 and March 31, 2017 numbers below. 

 

Days in Inventory:

  

December 31, 2016

 

March 31, 2017

 

December 31, 2017

 

March 31, 2018

Security Products

  

73 Days

 

67 Days

 

76 Days

 

77 Days

Marine Components

  

122 Days

 

82 Days

 

96 Days

 

88 Days

Consolidated CompX

  

79 Days

 

69 Days

 

79 Days

 

79 Days

 

Investing activities. Our capital expenditures were $0.6 million in each of the first three months of 2017 and 2018. During the first quarter of 2018, Valhi repaid a net $0.2 million under the promissory note ($12.4 million of gross borrowings and $12.6 million of gross repayments). During the first quarter of 2017, Valhi borrowed a net $1.6 million under the promissory note ($14.1 million of gross borrowings and $12.5 million of gross repayments). See Note 9 to the Condensed Consolidated Financial Statements.  

Financing activities.  Financing activities consisted only of quarterly cash dividends ($0.05 per share) and were comparable for the noted periods.

Future cash requirements

Liquidity. Our primary source of liquidity on an on-going 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.

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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 $28.4 million aggregate cash and cash equivalents at March 31, 2018 were held in the U.S.

Capital Expenditures. Firm purchase commitments for capital projects in process at March 31, 2018 totaled $0.6 million.  Our 2018 capital investments are limited to those expenditures required to meet our expected customer demand and those required to properly maintain our facilities and technology infrastructure.

Commitments and Contingencies. There have been no material changes in our contractual obligations since we filed our 2017 Annual Report and we refer you to that report for a complete description of these commitments.

Off-balance sheet financing arrangements

We do not have any off-balance sheet financing agreements other than the operating leases discussed in our 2017 Annual Report.

Recent accounting pronouncements –

See Note 10 to our Condensed Consolidated Financial Statements.

Critical accounting policies –

There have been no changes in the first three months of 2018 with respect to our critical accounting policies presented in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2017 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 2017 Annual Report, and we refer you to Part I, Item 7A – “Quantitative and Qualitative Disclosure About Market Risk” in our 2017 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 James W. Brown, our Vice President, Chief Financial Officer and Controller, has evaluated the design and operating effectiveness of our disclosure controls and procedures as of March 31, 2018. 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:

 

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets,

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Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors, and

 

Provide reasonable assurance regarding prevention or timely detection of an unauthorized acquisition, use or disposition of our assets that could have a material effect on our Condensed Consolidated Financial Statements.

Changes in Internal Control Over Financial Reporting.  There have been no changes in our internal control over financial reporting during the quarter ended March 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

- 17 -


Part II. OTHER INFORMATION

 

ITEM  1A.

Risk Factors.

Reference is made to the 2017 Annual Report for a discussion of the risk factors related to our businesses. There have been no material changes in such risk factors during the first three months of 2018.

 

 

ITEM  6.

Exhibits.

 

Item No.

  

Exhibit Index

 

 

 

31.1

 

Certification

 

31.2

  

Certification

 

32.1

  

Certification

 

101.INS

  

XBRL Instance Document

 

101.SCH

  

XBRL Taxonomy Extension Schema

 

101.CAL

  

XBRL Taxonomy Extension Calculation Linkbase

 

101.DEF

  

XBRL Taxonomy Extension Definition Linkbase

 

101.LAB

  

XBRL Taxonomy Extension Label Linkbase

 

101.PRE

  

XBRL Taxonomy Extension Presentation Linkbase

 

We have retained a signed original of any of the above exhibits that contains signatures, and we will provide such exhibit to the Commission or its staff upon request. We will also furnish, without charge, a copy of our Code of Business Conduct and Ethics, and Audit Committee Charter, each as adopted by our board of directors on June 3, 2015, upon request. Such requests should be directed to the attention of our Corporate Secretary at our corporate offices located at 5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240.

- 18 -


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.

 

 

 

COMPX INTERNATIONAL INC.

 

 

(Registrant)

 

 

 

Date:  May 7, 2018

 

By:

 

/s/ James W. Brown

 

 

 

 

James W. Brown

 

 

 

 

Vice President, Chief Financial Officer and Controller

 

 

- 19 -