COMPX INTERNATIONAL INC. Business Overview
We are a leading manufacturer of engineered components utilized in a variety of applications and industries. Through our Security Products segment we manufacture mechanical and electrical cabinet locks and other locking mechanisms used in recreational transportation, postal, office and institutional furniture, cabinetry, tool storage and healthcare applications. We also manufacture stainless steel exhaust systems, gauges, throttle controls, wake enhancement systems and trim tabs for the recreational marine and other industries through our Marine Components segment.
Operating Income Overview
We reported operating income of
Our product offerings consist of 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 - 2019 Compared to 2018 and 2018 Compared to 2017
Years ended December 31, % Change
2017 2018 2019 2017-18 2018-19
(In millions)
Net sales $ 112.0 $ 118.2 $ 124.2 6 % 5 %
Cost of sales 77.2 79.9 85.2 4 7
Gross margin 34.8 38.3 39.0 10 2
Operating costs and expenses 19.6 20.5 21.3
4 4 Operating income$ 15.2 $ 17.8 $ 17.7 17 (1 ) Percent of net sales: Cost of sales 68.9 % 67.6 % 68.6 % Gross margin 31.1 32.4 31.4 Operating costs and expenses 17.5 17.3 17.1 Operating income 13.6 15.1 14.2Net Sales . Net sales increased approximately$6.0 million in 2019 compared to 2018 primarily due to higher Marine Components sales to the towboat market. Relative changes in selling prices did not have a material impact on net sales comparisons. Net sales increased approximately$6.2 million in 2018 compared to 2017 primarily due to higher Marine Components sales volumes to manufacturers of ski/wakeboard boats and larger center-console boats, and to a lesser extent higher Security Products sales to certain markets, particularly transportation and office furniture. Relative changes in selling prices did not have a material impact on net sales comparisons. - 12 - -------------------------------------------------------------------------------- Cost of Sales and Gross Margin. Cost of sales increased in 2019 compared to 2018 due to the effects of increased sales volumes for both Security Products and Marine Components and increased labor costs at Security Products. As a result, gross margin as a percentage of sales decreased over the same period. The decrease in gross margin percentage is the result of the decline in Security Products gross margin percentage in 2019 as compared to 2018. Cost of sales increased from 2017 to 2018 primarily due to increased sales volumes for both the Security Products and Marine Components segments. Gross margin dollars and gross margin as a percentage of sales increased from 2017 to 2018 primarily due to greater fixed cost leverage facilitated by higher production volumes for each of our business segments. 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 gains and losses on sales of property and equipment. Operating costs and expenses as a percentage of sales were comparable in 2017, 2018 and 2019. Operating Income. As a percentage of net sales, operating income decreased from 2018 to 2019 while operating income increased from 2017 to 2018. Operating margins were primarily impacted by the factors impacting cost of sales, gross margin and operating costs discussed above. General. Our profitability primarily depends on our ability to utilize our production capacity effectively, which is affected by, among other things, the demand for our products and our ability to control our manufacturing costs, primarily comprised of labor costs and materials. The materials used in our products consist of purchased components and raw materials some of which are subject to fluctuations in the commodity markets such as zinc, brass and stainless steel. Total material costs represented approximately 45% of our cost of sales in 2019, with commodity-related raw materials accounting for approximately 13% of our cost of sales. During 2018, markets for the primary commodity-related raw materials used in the manufacture of our locking mechanisms, primarily zinc and brass, generally strengthened, but moderated at the end of 2018 and remained relatively stable through 2019. Over that same period, the market for stainless steel, the primary raw material used for the manufacture of marine exhaust headers and pipes and wake enhancement systems, remained relatively stable. While we expect the markets for our primary commodity-related raw materials to remain stable during 2020, we recognize that economic conditions could introduce renewed volatility on these and other manufacturing materials.
We occasionally enter into short-term commodity-related raw material supply arrangements to mitigate the impact of future increases in commodity related raw material costs. See Item 1 - "Business- Raw Materials."
Interest Income. Interest income in 2019 increased compared to 2018 primarily due to higher average loan balances and higher interest rates on our loan to an affiliate as well as higher average investment balances and higher interest rates on our cash investments. Interest income in 2018 increased compared to 2017 primarily due to higher interest rates on our loan to an affiliate as well as our cash investments. See Note 9 to the Consolidated Financial Statements. Provision for income taxes. A tabular reconciliation of our actual tax provision to theU.S. federal statutory income tax rate is included in Note 7 to the Consolidated Financial Statements. As a member of the group of companies consolidated forU.S. federal income tax purposes with Contran, the parent of our consolidatedU.S. federal income tax group, we compute our provision for income taxes on a separate company basis, using the tax elections made by Contran. Our effective income tax rate was 23% in 2017, 25% in 2018 and 24% in 2019. OnDecember 22, 2017 , H.R.1, formally known as the "Tax Cuts and Jobs Act" ("2017 Tax Act") was enacted into law. This tax legislation, among other changes, (i) reduced theU.S Federal corporate income tax rate from 35% to 21% effectiveJanuary 1, 2018 ; (ii) eliminated the domestic production activities deduction beginning in 2018; and (iii) allowed the expensing of certain capital expenditures. Following the enactment of the 2017 Tax Act, theSecurities 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 required that companies account for changes related to the 2017 Tax Act in - 13 - -------------------------------------------------------------------------------- the period of enactment unless the impact of such changes could not be reasonably estimated. Such revaluation resulted in a non-cash deferred income tax benefit of$1.9 million recognized in continuing operations for the period endedDecember 31, 2017 , reducing our net deferred income tax liability as of that date. During 2018 we finalized our analysis of the 2017 Tax Act and recorded an immaterial adjustment within the defined measurement period. See Notes 7 and 10 to our Consolidated Financial Statements. While our effective income tax rate for 2018 was favorably impacted by the reduction in theU.S. federal statutory income tax rate from 35% to 21%, our effective income tax rate was higher in 2018 as compared to 2017 due to the$1.9 million non-cash deferred income tax benefit recognized in 2017 resulting from the revaluation of our net deferred income tax liability discussed above. Our effective income tax rate was lower in 2019 as compared to 2018 primarily due to recognizing a current cash tax benefit of$0.2 million in 2019 resulting from a deduction under the foreign derived intangible income provisions ($0.1 million of such current cash tax benefit is related to 2018).
Segment Results
The key performance indicator for our segments is the level of their operating
income (see discussion below). For additional information regarding our segments
refer to Note 2 to our Consolidated Financial Statements.
Years ended December 31, % Change
2017 2018 2019 2017-18 2018-19
(In millions)
Security Products:
Net sales $ 96.6 $ 98.4 $ 99.3 2 % 1 %
Cost of sales 65.5 65.5 67.1 - 2
Gross margin 31.1 32.9 32.2 6 (2 )
Operating costs and expenses 11.9 11.0 11.2 (9 ) 3
Operating income $ 19.2 $ 21.9 $ 21.0 14 (4 )
Gross margin 32.2 % 33.4 % 32.5 %
Operating income margin 19.9 22.3 21.2
Security Products. Security Products net sales increased 1% to $99.3 million in
2019 compared to $98.4 million in 2018, primarily due to higher sales to
government security and medical cart manufacturing markets, partially offset by
lower sales to the transportation, electronic control panel and distribution
markets. As a percentage of sales, gross margin and operating income for 2019
declined as compared to 2018 primarily due to increased labor rates and
associated payroll costs resulting from regional pressure on wages for certain
skilled labor positions, partially offset by favorable medical costs.
Security Products net sales increased 2% to $98.4 million in 2018 compared to
$96.6 million in 2017, primarily due to higher sales to the transportation and
office furniture markets. As a percentage of sales, gross margin for 2018
increased slightly over 2017 due to lower production costs, including headcount
reductions made during the second quarter of 2017, and improved coverage of
fixed costs over increased production volumes. Operating costs and expenses for
2018 were slightly lower than 2017. As a result, Security Products operating
income as a percentage of net sales for 2018 exceeded 2017.
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Years ended December 31, % Change
2017 2018 2019 2017-18 2018-19
(In millions)
Marine Components:
Net sales $ 15.4 $ 19.8 $ 24.9 29 % 26 %
Cost of sales 11.7 14.4 18.2 23 26
Gross margin 3.7 5.4 6.7 46 25Operating costs and expenses 2.4 2.7 3.1
13 16 Operating income$ 1.3 $ 2.7 $ 3.6 104 33 Gross margin 24.0 % 27.2 % 27.0 % Operating income margin 8.7 13.8 14.6 Marine Components. Marine Components net sales increased 26% in 2019 as compared to 2018 primarily due to increased sales to the towboat market, primarily wake enhancement systems and surf pipes to an original equipment boat manufacturer. Gross margin as a percentage of sales in 2019 was comparable to 2018. Operating income as a percentage of net sales increased in 2019 compared to 2018 principally due to improved leverage on operating costs and expenses facilitated by higher production volumes. Marine Components net sales increased 29% in 2018 as compared to 2017 as a result of continued strong demand for our products, particularly those sold to the ski/wakeboard boat market as well as to manufacturers of large center-console boats and industrial customers. Gross margin and operating income as a percentage of net sales increased in 2018 compared to 2017 principally due to improved fixed cost leverage facilitated by higher production volumes. Outlook. 2019 was a breakout year for our Marine Components segment which sustained the significant growth we experienced in the second half of 2018 for the full year of 2019. We expect growth of this segment to be more normalized in 2020. Our Security Products segment experienced modest sales growth in 2019; however we began to notice headwinds late in 2019 which may carry into 2020. In 2020, we plan to capitalize on the positive momentum our Marine Components segment has experienced over the last two years while maintaining strong results in our Security Products segment. 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.
Critical Accounting Policies and Estimates
Our significant accounting policies are more fully described in Note 1 to our Consolidated Financial Statements. Our Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted inthe United States of America (GAAP) which requires us to make estimates, judgments, and assumptions we believe are reasonable based on our historical experience, contract terms, observations of known trends in our company and the industry as a whole and information available from other outside sources. Our estimates affect the reported amounts of assets and liabilities and related disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expense during the reporting period. Actual results may differ from initial estimates. We believe the most critical accounting policies and estimates involving significant judgments and estimates primarily relate to the considerations in the impairment assessments for goodwill and certain long-lived assets. We have discussed the development, selection and disclosure of our critical accounting estimates with the Audit Committee of our Board of Directors.
•
relating to our Security Products segment. Goodwill is required to be
tested annually or at other times whenever an event occurs or
circumstances change that would more-likely-than-not reduce the fair
value of a reporting unit below
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its carrying value. We perform our annual goodwill impairment test in
the third quarter of each year. In addition, adverse industry or
economic trends, lower projections of profitability, or a sustained
decline in our market capitalization, among other items, may be
indications of potential impairment issues which are triggering events
requiring the testing of an asset's carrying value for recoverability.
An entity may first assess qualitative factors to determine whether it
is necessary to complete the two-step quantitative impairment test using
a more-likely-than-not criteria. If an entity believes it is
more-likely-than-not the fair value of a reporting unit is greater than
its carrying value, including goodwill, the two-step quantitative
impairment test can be bypassed. Alternatively, an entity has an
unconditional option to bypass the qualitative assessment and proceed
directly to performing the two-step quantitative impairment test.
When performing a qualitative assessment considerable management judgment is
necessary to evaluate the qualitative impact of events and circumstances on the
fair value of a reporting unit. Events and circumstances considered in our
impairment evaluations, such as historical profits and stability of the markets
served, are consistent with factors utilized with our internal projections and
operating plan. However, future events and circumstances could result in
materially different findings which could result in the recognition of a
material goodwill impairment.
Evaluations of possible impairment utilizing the two-step quantitative
impairment test require us to estimate, among other factors: forecasts of future
operating results, revenue growth, operating margin, tax rates, capital
expenditures, depreciation, working capital, weighted average cost of capital,
long-term growth rates, risk premiums, terminal values, and fair values of our
reporting units and assets. The goodwill impairment test is subject to
uncertainties arising from such events as changes in competitive conditions, the
current general economic environment, material changes in growth rate
assumptions that could positively or negatively impact anticipated future
operating conditions and cash flows, changes in the discount rate, and the
impact of strategic decisions. If any of these factors were to materially change
such change may require revaluation of our goodwill. Changes in estimates or the
application of alternative assumptions could produce significantly different
results.
In 2019, we used the qualitative assessment for our annual impairment test and
determined it was not necessary to perform the quantitative goodwill impairment
test, as we concluded it is more-likely- than-not the fair value of the security
products reporting unit exceeded its carrying amount. See Notes 1 and 5 to our
Consolidated Financial Statements.
• Long-lived assets - The net book value of our property and equipment
totaled
equipment for impairment only when circumstances indicate an impairment
may exist. Our determination is based upon, among other things, our
estimates of the amount of future net cash flows to be generated by thelong-lived asset (Level 3 inputs) and our estimates of the current fair
value of the asset.
Significant judgment is required in estimating such cash flows. Adverse
changes in such estimates of future net cash flows or estimates of fair
value could result in an inability to recover the carrying value of the
long-lived asset, thereby possibly requiring an impairment charge to be
recognized in the future. We do not assess our property and equipment
for impairment unless certain impairment indicators are present. We did
not evaluate any long-lived assets for impairment during 2019 because no
such impairment indicators were present.
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Liquidity and Capital Resources
Summary
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, business combinations or buying back shares of our outstanding stock and (iii) provide for the payment of dividends (if declared). From time-to-time, we may incur indebtedness to fund capital expenditures, business combinations or other investment activities. In addition, from time-to-time, we may also sell assets outside the ordinary course of business, the proceeds of which are generally used to repay indebtedness (including indebtedness which may have been collateralized by the assets sold) or to fund capital expenditures or business combinations. Consolidated cash flows Operating activities. Trends in cash flows from operating activities, excluding changes in assets and liabilities, for the last three years have generally been similar to the trends in our earnings. Depreciation and amortization were comparable in each of 2019, 2018 and 2017. See Note 1 to our Consolidated Financial Statements. Changes in assets and liabilities result primarily from the timing of production, sales and purchases. Such changes in assets and liabilities generally tend to even out over time. However, year-to-year relative changes in assets and liabilities can significantly affect the comparability of cash flows from operating activities. Cash provided by operating activities was$18.5 million in 2019 compared to$17.2 million in 2018. The$1.3 million increase in cash provided by operating activities is primarily the net result of:
• A
• A $0.7 million increase in cash paid for taxes in 2019 due to the
relative timing of payments, and
• A lower amount of net cash used by relative changes in inventories,
receivables, payables and non-tax accruals of
Cash provided by operating activities was
• A
• A
impact of the lower
than offset the effect of increased profits in 2018, and
• A higher amount of net cash used by relative changes in inventories,
receivables, payables and non-tax accruals of
Relative changes in working capital can have a significant effect on cash flows from operating activities. As shown below, our total average days sales outstanding decreased fromDecember 31, 2018 toDecember 31, 2019 primarily as a result of the timing of sales and collections in the last month of 2019 as compared to 2018. For comparative purposes, we have provided 2017 numbers below. December 31, December 31, December 31, Days Sales Outstanding: 2017 2018 2019 Security Products 39 Days 43 Days 38 Days Marine Components 31 Days 30 Days 27 Days Total 38 Days 40 Days 36 Days As shown below, our average number of days in inventory atDecember 31, 2019 is comparable toDecember 31, 2018 . The variability in days in inventory among our segments primarily relates to the complexity of - 17 -
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the production processes, and therefore the length of time it takes to produce end products, as well as seasonal cycles. For comparative purposes, we have provided 2017 numbers below.
December 31, December 31, December 31,
Days in Inventory: 2017 2018 2019
Security Products 76 Days 77 Days 76 Days
Marine Components 96 Days 91 Days 100 Days
Total 79 Days 80 Days 81 Days
Investing activities. Capital expenditures have primarily emphasized improving
our manufacturing facilities and investing in manufacturing equipment, utilizing
new technologies and increased automation of the manufacturing process, to
provide for increased productivity and efficiency in order to meet expected
customer demand and properly maintain our facilities and technology
infrastructure. Capital expenditures were $2.8 million in 2017, $3.1 million in
2018 and $3.2 million in 2019. See Note 2 to our Consolidated Financial
Statements.
Capital expenditures for 2020 are estimated at approximately $4.0 million
primarily to maintain and improve the cost-effectiveness of our facilities and
equipment. Capital spending for 2020 is expected to be funded through cash on
hand and cash generated from operations.
We have entered into an unsecured revolving demand promissory note with Valhi
whereby we have agreed to loan Valhi up to $40 million . Our loan to Valhi, as
amended, bears interest at prime rate plus 1.00%, payable quarterly, with all
principal due on demand, but in any event no earlier than December 31,
2021 . Loans made to Valhi at any time under the agreement are at our discretion.
During 2018, Valhi repaid a net $4.2 million under the promissory note for an
outstanding balance of $34.0 million at December 31, 2018 ($46.8 million of
gross borrowings and $51.0 million of gross repayments). During 2019, Valhi
repaid a net $5.9 million under the promissory note for an outstanding balance
of $28.1 million at December 31, 2019 ($34.9 million of gross borrowings and
$40.8 million of gross repayments). See Note 9 to our Consolidated Financial
Statements.
Financing activities. Cash dividends paid totaled $2.5 million ($.20 per share,
or $.05 per share per quarter) in each of 2017 and 2018 and $3.5 million ($.28
per share, or $.07 per share per quarter) in 2019. On February 26, 2020 our
board of directors declared a first quarter 2020 dividend of $.10 per share, to
be paid on March 19, 2020 to CompX stockholders of record as of March 9, 2020 .
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.
Future Cash Requirements
We believe cash generated from operations together with cash on hand will be sufficient to meet our liquidity needs for working capital, capital expenditures, debt service and dividends (if declared) for the next twelve months and our long term obligations for the next five years. To the extent that actual operating results or other developments differ materially from our expectations, our liquidity could be adversely affected.
All of our
We periodically evaluate our 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, repurchase shares of our common
stock, 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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Off balance sheet financing arrangements
Neither we nor any of our subsidiaries or affiliates are parties to any off-balance sheet financing arrangements.
Commitments and contingencies
As more fully described in the notes to the Consolidated Financial Statements, we are a party to various agreements that contractually and unconditionally commit us to pay certain amounts in the future. See Note 10 to our Consolidated Financial Statements. The following table summarizes such contractual commitments as ofDecember 31, 2019 by the type and date of payment. Payments due by period 2025 and Total 2020 2021-2022 2023-2024 after (In thousands) Operating leases$ 180 $ 123 $ 55 $ 2 $ - Purchase obligations 12,300 12,159 141 - - Income taxes 984 984 - - - Fixed asset acquisitions 243 243 - - -
Total contractual cash obligations
$ 2 $ -
The timing and amount shown for our commitments related to operating leases and fixed asset acquisitions are based upon the contractual payment amount and the contractual payment date for those commitments. The timing and amount shown for purchase obligations, which consist of all open purchase orders and contractual obligations (primarily commitments to purchase raw materials), is also based on the contractual payment amount and the contractual payment date for those commitments. The amount shown for income taxes is the consolidated amount of income taxes payable atDecember 31, 2019 , which is assumed to be paid during 2020. Fixed asset acquisitions include firm purchase commitments for capital projects.
Recent accounting pronouncements
See Note 12 to our Consolidated Financial Statements.
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