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, trim tabs and related hardware and accessories for the recreational marine and other industries through our Marine Components segment.
Operating Income Overview
We experienced normal sales volumes and operations during the first quarter of 2020. Beginning in lateMarch 2020 as a result of the COVID-19 pandemic, we began receiving requests from certain customers of both our Security Products and Marine Components segments to postpone shipments, in some cases because our customers' production facilities were temporarily closed. The second quarter of 2020 sustained the greatest impact from COVID-19 related order cancellations and delays. In the third and fourth quarters, Marine Components experienced significant recovery in sales, while Security Products sales generally recovered, though not to pre-pandemic levels. We reported operating income of$11.8 million in 2020 compared to operating income of$17.7 million in 2019 and$17.8 million in 2018. The decrease in operating income in 2020 over 2019 is primarily due to a decline in net sales and gross margins discussed below. Operating income in 2019 was comparable to operating income in 2018. 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 - 2020 Compared to 2019 and 2019 Compared to 2018
Years ended December 31, % Change
2018 2019 2020 2018-19 2019-20
(In millions)
Net sales $ 118.2 $ 124.2 $ 114.5 5 % (8 ) %
Cost of sales 79.9 85.2 81.7 7 (4 )
Gross margin 38.3 39.0 32.8 2 (16 )
Operating costs and expenses 20.5 21.3 21.0 4 (1 )
Operating income $ 17.8 $ 17.7 $ 11.8 (1 ) (33 )
Percent of net sales:
Cost of sales 67.6 % 68.6 % 71.3 %
Gross margin 32.4 31.4 28.7Operating costs and expenses 17.3 17.1 18.4 Operating income
15.1 14.2 10.3
Net Sales . Net sales decreased approximately $9.7 million in 2020 compared to
2019 primarily due to lower Security Products sales across a variety of markets
due to reduced demand resulting from the COVID-19
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pandemic, offset slightly by higher Marine Component sales to the towboat market. Relative changes in selling prices did not have a material impact on net sales comparisons.
Net sales increased approximately
Cost of Sales and Gross Margin. Cost of sales decreased in 2020 compared to 2019 primarily due to the effects of lower sales for Security Products slightly offset by the higher Marine Component sales discussed above. Gross margin as a percentage of sales decreased over the same period primarily as a result of lower gross margin percentage at Security Products. Cost of sales increased in 2019 compared to 2018 due to the effects of increased sales 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. 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 increased in 2020 compared to 2019 due to the effect of lower sales. Operating costs and expenses as a percentage of sales in 2019 were comparable to 2018. Operating Income. As a percentage of net sales, operating income decreased from 2019 to 2020 and decreased from 2018 to 2019. 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 43% of our cost of sales in 2020, with commodity-related raw materials accounting for approximately 12% of our cost of sales. During 2019 and 2020, markets for the primary commodity-related raw materials used in the manufacture of our locking mechanisms, primarily zinc and brass, remained relatively stable. Over those same periods, the market for stainless steel, the primary raw material used for the manufacture of marine exhaust headers and pipes and wake enhancement systems, also remained relatively stable. While we expect the markets for our primary commodity-related raw materials to remain stable during 2021, 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 2020 decreased compared to 2019 primarily due to lower average loan balances and lower interest rates on our loan to an affiliate as well as lower interest rates on our cash investments. 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. 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 of 21% 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. - 14 - -------------------------------------------------------------------------------- Our effective income tax rate was 25% in 2018 and 24% in each of 2019 and 2020. 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 ($0.1 million of such current cash tax benefit is related to 2018). See Notes 7 and 10 to our Consolidated Financial Statements. We currently expect our effective income tax rate for 2021 to be comparable to our effective income tax rate for 2020. Segment Results The key performance indicator for our segments is the level of their operating income (see discussion below). For additional information regarding our segments refer to Note 2 to our Consolidated Financial Statements. Years ended December 31, % Change 2018 2019 2020 2018-19 2019-20 (In millions) Security Products: Net sales$ 98.4 $ 99.3 $ 87.9 1 % (12 ) % Cost of sales 65.5 67.1 62.1 2 (7 ) Gross margin 32.9 32.2 25.8 (2 ) (20 ) Operating costs and expenses 11.0 11.2 10.9 3 (3 ) Operating income$ 21.9 $ 21.0 $ 14.9 (4 ) (29 ) Gross margin 33.4 % 32.5 % 29.4 % Operating income margin 22.3 21.2 17.0 Security Products. Security Products net sales decreased 12% to$87.9 million in 2020 compared to$99.3 million in 2019. Certain security products market segments were slower to recover from the negative impact of COVID-19, primarily in the second and third quarters, including transportation which had$4.4 million lower sales than the 2019, distribution customers which were$2.5 million lower than 2019, and office furniture which was$1.8 million lower than the same period in 2019. Gross margin and operating income margin for 2020 declined as compared to 2019 primarily due to lower sales and higher cost inventory produced during the second and third quarters and sold in the last half of the year. Security Products inventory produced during the second and third quarters of 2020 had a higher carrying value compared to prior periods due to higher cost per unit of production as a result of lower production volumes during these quarters of 2020. This negatively impacted our gross margin and operating income margin as this higher cost inventory was sold during the last half of 2020. Additionally, gross margin and operating income margin were unfavorably impacted by employer paid medical costs, unrelated to the pandemic, which increased$2.1 million in 2020 compared to 2019. 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. - 15 -
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Years ended December 31, % Change
2018 2019 2020 2018-19 2019-20
(In millions)
Marine Components:
Net sales $ 19.8 $ 24.9 $ 26.6 26 % 7 %
Cost of sales 14.4 18.2 19.6 26 8
Gross margin 5.4 6.7 7.0 25 5
Operating costs and expenses 2.7 3.1 2.9 16 (4 )
Operating income $ 2.7 $ 3.6 $ 4.1 33 12
Gross margin 27.2 % 27.0 % 26.4 %
Operating income margin 13.8 14.6 15.3
Marine Components. Marine Components net sales increased 7% in 2020 as compared
to 2019 primarily due to increased sales of $2.9 million to the towboat market,
primarily wake enhancement systems and surf pipes to an original equipment boat
manufacturer, predominantly in the second half of the year. Gross margin as a
percentage of sales in 2020 was slightly below 2019 due to higher cost inventory
produced during the second quarter and sold in the third quarter of the year, as
well as higher depreciation expense resulting from the timing of capital
expenditures. Operating income as a percentage of net sales increased in 2020
compared to 2019 principally due to the slight decrease in operating costs and
expenses.
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 coverage on operating costs and expenses facilitated by higher
production volumes.
Outlook. In the second half of 2020, our sales began to recover from the
historically low levels we experienced during the second quarter, with sales
steadily improving for the remainder of the year. The COVID-19 pandemic
continues to impact our operations and demand for our products particularly in
the transportation, office furniture and distribution markets served by our
Security Products segment. In the second half of the year, our manufacturing
operations returned to more normal production rates as demand from our customers
began to return, although for our Security Products segment, below pre-pandemic
levels. Our global and domestic supply chains remain intact, and we have
experienced minimal supply chain disruptions. The markets we sell to have
recovered to varying degrees, and we continue to work closely with all our
customers and monitor their progress as they continue to adjust their
operations. Even with the severe downturn during the second quarter, Marine
Component segment sales outpaced prior year as demand for recreational boats
increased as people sought socially distanced, outdoor activities. We expect
these trends to continue for at least the first part of 2021.
Considerable effort continues at all our locations to manage COVID-19 conditions
including enhanced health and safety protocols and cleaning and disinfecting
efforts. Throughout the course of the COVID-19 pandemic, we have focused our
efforts on maintaining efficient operations while closely managing our expenses
and capital projects. In this regard, we are constantly evaluating our staffing
levels and we believe our current staffing levels are aligned with our sales and
production forecasts for the first part of 2021.
The advance of the COVID-19 pandemic and the global efforts to mitigate its
spread have resulted in sharp contractions of vast areas of the global economy
and are expected to continue to challenge workers, businesses and governments
for the foreseeable future. Government actions in various regions have
generally permitted the gradual resumption of commercial activities following
various regional shutdowns, but further government action restricting economic
activity is possible in an effort to mitigate increases in COVID-19 cases in
certain regions. The success and timing of these mitigating actions will depend
in part on continued deployment of effective tools to fight COVID-19, including
availability of testing, effective treatments and vaccine distribution,
before economic growth is likely to return to pre-pandemic levels. Even as these
measures are implemented and become effective, they will not directly address
the business and employment losses already experienced. As a result, we expect
U.S. and worldwide gross domestic product to be significantly impacted for an
indeterminate period.
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-------------------------------------------------------------------------------- Based on current conditions, we expect to report increased revenue and operating income in 2021 compared to 2020 but we do not expect Security Products to return to pre-pandemic levels experienced in 2019. As noted above, our Security Products production volumes remain below 2019 levels. As a result, we expect to continue to experience the negative impact of higher fixed costs per unit of production during 2021 which will continue to challenge gross margins in the segment. The severity of the impact of COVID-19 on 2021 will depend on customer demand for our products, including the timing and extent to which our customers' operations continue to be impacted, on our customers' perception as to when consumer demand for their products will return to pre-pandemic levels and on any future disruptions in our operations or our suppliers' operations, all of which are difficult to predict. Our operations teams meet frequently to ensure we are taking appropriate actions to maintain a safe working environment for all our employees, minimize operational disruptions, manage inventory levels and improve operating margins. It is possible we may temporarily close one or more of our facilities for the health and safety of our employees before the COVID-19 pandemic is over.
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 reporting unit, which corresponds to
our Security Products operating 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 its carrying value. We perform ourannual goodwill impairment test in the third quarter of each year, 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 its
carrying value. Such events or circumstances may include: adverse
industry or economic trends, lower projections of profitability, or a
sustained decline in our market capitalization. These events or
circumstances, 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
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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 2020, 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 2020 because no
such impairment indicators were present.
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 2020, 2019 and 2018. 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$15.5 million in 2020 compared to$18.5 million in 2019. The$3.0 million decrease in cash provided by operating activities was primarily the net result of:
• A
• A
average interest rates and to a lesser extent lower average loan
balances on our loan to an affiliate, partially offset by the relative
timing of interest received,
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• A
operating income, and
• A higher amount of net cash provided by relative changes in inventories,
receivables, payables and non-tax accruals of
Cash provided by operating activities was
• 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
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, 2019 toDecember 31, 2020 primarily as a result of the timing of sales and collections in the last month of 2020 as compared to 2019. For comparative purposes, we have provided 2018 numbers below. December 31, December 31, December 31, Days Sales Outstanding: 2018 2019 2020 Security Products 43 Days 38 Days 35 Days Marine Components 30 Days 27 Days 24 Days Total 40 Days 36 Days 33 Days As shown below, our average number of days in inventory decreased fromDecember 31, 2019 toDecember 31, 2020 , particularly for Marine Components. The average number of days in inventory for Marine Components decreased primarily as a result of rapid sales growth in the fourth quarter of 2020. For comparative purposes, we have provided 2018 numbers below. December 31, December 31, December 31, Days in Inventory: 2018 2019 2020 Security Products 77 Days 76 Days 75 Days Marine Components 91 Days 100 Days 75 Days Total 80 Days 81 Days 75 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$3.1 million in 2018,$3.2 million in 2019 and$1.7 million in 2020. As a result of the COVID-19 pandemic, we limited 2020 expenditures to those required to meet our expected customer demand and those required to properly maintain our facilities and technology infrastructure. See Note 2 to our Consolidated Financial Statements. Capital expenditures for 2021 are estimated at approximately$4.0 million primarily to maintain and improve the cost-effectiveness of our facilities and equipment. Capital spending for 2021 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 thanDecember 31, 2022 . Loans made to Valhi at any time under the agreement are at our discretion. During 2019, Valhi repaid a net$5.9 million under the promissory note for an outstanding balance of$28.1 million atDecember 31, 2019 ($34.9 million of gross borrowings and$40.8 million of gross repayments). During 2020, Valhi borrowed a net$1.4 million under the promissory note for an outstanding balance of$29.5 million atDecember 31, 2020 ($34.8 million of gross borrowings and$33.4 million of gross repayments). See Note 9 to our Consolidated Financial Statements. - 19 -
-------------------------------------------------------------------------------- Financing activities. Cash dividends paid totaled$2.5 million ($.20 per share, or$.05 per share per quarter) in 2018,$3.5 million ($.28 per share, or$.07 per share per quarter) in 2019, and$5.0 million ($.40 per share, or$.10 per share per quarter) in 2020. OnMarch 3, 2021 our board of directors declared a first quarter 2021 dividend of$.20 per share, to be paid onMarch 23, 2021 toCompX stockholders of record as ofMarch 15, 2021 . 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.
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, 2020 by the type and date of payment. Payments due by period 2026 and Total 2021 2022-2023 2024-2025 after (In thousands) Operating leases$ 65 $ 62 $ 2 $ 1 $ - Purchase obligations 13,142 13,124 18 - - Income taxes 952 952 - - - Fixed asset acquisitions 324 324 - - -
Total contractual cash obligations
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
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the consolidated amount of income taxes payable at December 31, 2020 , which is
assumed to be paid during 2021. 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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