Business Overview
We are a leading manufacturer of engineered components utilized in a variety of applications and industries. Through our Security Products segment we manufacture mechanical and electrical cabinet locks and other locking mechanisms used in recreational transportation, postal, office and institutional furniture, cabinetry, tool storage and healthcare applications. We also manufacture stainless steel exhaust systems, gauges, throttle controls, wake enhancement systems, trim tabs and related hardware and accessories for the recreational marine and other industries through our Marine Components segment.
General
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Statements in this Quarterly Report that are not historical facts are forward-looking in nature and represent management's beliefs and assumptions based on currently available information. In some cases, you can identify forward-looking statements by the use of words such as "believes," "intends," "may," "should," "could," "anticipates," "expects" or comparable terminology, or by discussions of strategies or trends. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we do not know if these expectations will be correct. Such statements by their nature involve substantial risks and uncertainties that could significantly impact expected results. Actual future results could differ materially from those predicted. The factors that could cause actual future results to differ materially from those described herein are the risks and uncertainties discussed in this Quarterly Report and those described from time to time in our other filings with theSEC 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 products and product
features, ? Future litigation, ? Our ability to protect or defend our intellectual property rights, ? 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 disrupt or introduce
instability into our supply chain, impact our customers' level of demand or our customers' perception regarding demand or impair our ability to
operate our facilities (including changes in the level of gross domestic
product in various regions of the world, natural disasters, terrorist
acts, global conflicts and public health crises such as COVID-19),
? Operating interruptions (including, but not limited to labor disputes,
hazardous chemical leaks, natural disasters, fires, explosions, unscheduled or unplanned downtime, transportation interruptions, cyber-attacks and public health crises such as COVID-19); 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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Operating Income Overview
In the first quarter of 2021 operating income increased to$5.8 million compared to$5.0 million in the first quarter of 2020, before our sales volumes and operations had been significantly affected by the COVID-19 pandemic. The increase in operating income in the first quarter of 2021 compared to 2020 primarily resulted from higher Marine Components sales to the towboat market. We sustained the greatest negative operating impact from COVID-19 in the second quarter of 2020 to both of our business segments. Beginning in the third quarter of 2020 and continuing through the first quarter of 2021, Marine Components experienced a significant recovery in sales, while Security Products sales generally improved sequentially, though not to pre-pandemic levels. We sell a large number of products that have a wide variation in selling price and manufacturing cost, which results in certain practical limitations on our ability to quantify the impact of changes in individual product sales quantities and selling prices on our net sales, cost of goods sold and gross profit. In addition, small variations in period-to-period net sales, cost of goods sold and gross profit can result from changes in the relative mix of our products sold. Results of Operations Three months ended March 31, 2020 % 2021 % (Dollars in thousands) Net sales$ 32,311 100.0 %$ 35,924 100.0 % Cost of sales 21,880 67.7 24,889 69.3 Gross margin 10,431 32.3 11,035 30.7
Operating costs and expenses 5,411 16.8 5,218 14.5 Operating income
$ 5,020 15.5 %$ 5,817 16.2 % Net sales. Net sales increased$3.6 million in the first quarter of 2021 compared to the same period in 2020 primarily due to higher Marine Component sales and to a lesser extent higher Security Products sales. Relative changes in selling prices did not have a material impact on net sales comparisons. Cost of sales and gross margin. Cost of sales as a percentage of sales increased 1.6% in the first quarter of 2021 compared to the same period in 2020. As a result, gross margin as a percentage of sales decreased over the same period. Gross margin percentage decreased in the first quarter of 2021 compared to the same period in 2020 due to the decline in the Security Products gross margin percentage partially offset by a slight increase in the Marine Components gross margin percentage. See segment discussion below. Operating costs and expenses. Operating costs and expenses consist primarily of sales and administrative-related personnel costs, sales commissions and advertising expenses directly related to product sales and administrative costs relating to business unit and corporate management activities, as well as gains and losses on property and equipment. Operating costs and expenses for the first quarter of 2021 were lower than the same period in 2020 primarily due to lower employer paid medical costs as well as lower travel related expenses. Operating costs and expenses as a percentage of net sales decreased in 2021 due to lower costs and higher sales. Operating income. As a percentage of net sales, operating income for the first quarter of 2021 increased compared to the same period of 2020 and was primarily impacted by the factors impacting cost of goods sold, gross margin and operating costs. See segment discussion below. Provision for income taxes. A tabular reconciliation of our actual tax provision to theU.S. federal statutory income tax rate is included in Note 6 to the Condensed Consolidated Financial Statements. Our operations are wholly within theU.S. and therefore our effective income tax rate is primarily reflective of theU.S. federal statutory rate and applicable state taxes. - 12 - --------------------------------------------------------------------------------
Segment Results
The key performance indicator for our segments is operating income.
Three months ended March 31, % 2020 2021 Change (Dollars in thousands) Security Products: Net sales$ 25,469 $ 25,885 2 % Cost of sales 16,911 17,652 4 Gross margin 8,558 8,233 (4 ) Operating costs and expenses 2,845 2,743 (4 ) Operating income$ 5,713 $ 5,490 (4 ) Gross margin 33.6 % 31.8 % Operating income margin 22.4 21.2 Security Products. Security Products net sales increased 2% in the first quarter of 2021 compared to the same period last year. This increase in sales is primarily due to$0.7 million of higher sales to the transportation market and$0.5 million of higher sales to the government security market, partially offset by lower sales to markets that continue to be slower to recover from the effects of the COVID-19 pandemic, including$0.4 million of lower sales to distribution customers and$0.3 million of lower sales to the office furniture market. Gross margin and operating income margin for the first quarter of 2021 declined as compared to 2020 primarily due to higher cost inventory produced during the fourth quarter of 2020 and sold in the first quarter of 2021. Security Products inventory produced during the fourth quarter of 2020 had a higher carrying value compared to the same period in 2019 due to higher cost per unit of production as a result of lower production volumes during the fourth quarter of 2020. This negatively impacted our gross margin and operating income margin as this higher cost inventory was sold during the first quarter of 2021. Additionally, gross margin and operating income margin were favorably impacted by lower employer paid medical costs of$0.7 million during the first quarter of 2021 compared to 2020. Three months ended March 31, % 2020 2021 Change (Dollars in thousands) Marine Components: Net sales$ 6,842 $ 10,039 47 % Cost of sales 4,969 7,237 46 Gross margin 1,873 2,802 50 Operating costs and expenses 791 859 9 Operating income$ 1,082 $ 1,943 80 Gross margin 27.4 % 27.9 % Operating income margin 15.8 19.4 Marine Components. Marine Components net sales increased 47% in the first quarter of 2021 compared to the same period last year primarily due to increased sales of$2.7 million to the towboat market, primarily wake enhancements systems and surf pipes to original equipment boat manufacturers. Marine Components continues to benefit from an overall increase in demand in the recreational marine market which began in late spring 2020. Gross margin and operating income as a percentage of sales increased in the first quarter of 2021 compared to the same period last year due to a favorable customer and product mix and increased coverage of fixed costs on higher sales as well as decreased employer paid medical costs. - 13 - -------------------------------------------------------------------------------- Outlook. We first began to feel the effects of the COVID-19 pandemic in lateMarch 2020 when 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, but its effects continued to be felt through most of the remainder of the year. In the second half of 2020, our sales began to recover from the historically low levels we experienced during the second quarter of 2020, with sales steadily improving for the remainder of the year and through the first quarter of 2021. In the first quarter of 2021, our manufacturing operations maintained normal production rates in-line with improved demand, although our Security Products segment still has some markets which continue to be slower to recover, particularly distributors and office furniture. Our supply chains remain intact although we have been moderately impacted by recent global and domestic supply chain disruptions. Thus far our operations team has been able to manage through these disruptions with minimal impact on our operations. Most of the markets we serve continue to recover, and we communicate closely with all our customers to monitor order levels. Marine Component segment sales outpaced prior year as demand for recreational boats increased as people sought socially distanced, outdoor activities. We expect this trend to continue during the remainder 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. The advance of the COVID-19 pandemic and the global efforts to mitigate its spread are expected to continue to challenge workers, businesses and governments during 2021. The success and timing of mitigating actions depends in part on continued deployment of effective tools to fight COVID-19, including effective treatments and vaccine distribution, before economies are likely to return to normal. In this regard, as part of our health and safety procedures, we are encouraging our employees to receive a COVID-19 vaccine and have offered paid time off to hourly employees to facilitate participation. Based on current conditions, we expect to report increased revenue and operating income in 2021 compared to 2020, despite some markets of the Security Products Segment that have not fully recovered to pre-pandemic levels. As a result, we expect to continue to experience higher fixed costs per unit of production during 2021 which will continue to challenge gross margins in the segment. 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 may be impacted, on our customers' perception as to consumer demand for their products and on any future disruptions in our operations or our suppliers' operations, all of which are difficult to predict. As noted above, there are global supply chain disruptions and certain of our customers have experienced temporary pauses in their operations as a result of these disruptions. Thus far these pauses have not had a material negative effect on our sales. Our operations teams meet frequently to ensure we are taking appropriate actions to maintain a safe working environment for all our employees, minimize material or supply related operational disruptions, manage inventory levels and improve operating margins. We are constantly evaluating our staffing levels and we believe our current staffing levels are aligned with our sales and production forecasts. - 14 - --------------------------------------------------------------------------------
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 for the first three months of 2021 increased by$2.2 million as compared to the first three months of 2020. The increase in net cash used is primarily due to the net effects of:
• A
• A
interest rates and to a lesser extent a lower average affiliate receivable
balance,
• A
timing of payments; and
• A higher amount of net cash used by relative changes in our inventories,
receivables, prepaids, payables and non-tax related accruals of
approximately
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 fromDecember 31, 2020 toMarch 31, 2021 varied by segment, primarily as a result of relative changes in the timing of collections but is consistent with prior year. For comparative purposes, we have providedDecember 31, 2019 andMarch 31, 2020 numbers below. Days Sales Outstanding: December 31, 2019 March 31, 2020 December 31, 2020 March 31, 2021 Security Products 38 Days 46 Days 35 Days 46 Days Marine Components 27 Days 33 Days 24 Days 33 Days Consolidated CompX 36 Days 43 Days 33 Days 43 Days Our total average number of days in inventory decreased fromDecember 31, 2020 toMarch 31, 2021 , 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 first quarter of 2021. For comparative purposes, we have providedDecember 31, 2019 andMarch 31, 2020 numbers below. Days in Inventory: December 31, 2019 March 31, 2020 December 31, 2020 March 31, 2021 Security Products 76 Days 78 Days 75 Days 72 Days Marine Components 100 Days 82 Days 75 Days 54 Days Consolidated CompX 81 Days 79 Days 75 Days 66 Days Investing activities. Our capital expenditures were$0.6 million and$0.4 million in the first three months of 2021 and 2020, respectively. During the first three months of 2021, Valhi repaid a net$0.3 million under the promissory note ($11.6 million of gross borrowings and$11.9 million of gross repayments). During the first three months of 2020, Valhi repaid a net$2.6 million under the promissory note ($15.6 million of gross borrowings and$18.2 million of gross repayments). See Note 9 to the Condensed Consolidated Financial Statements. Financing activities. InMarch 2021 , our board of directors increased our regular quarterly dividend from$.10 per share to$.20 per share beginning in the first quarter of 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.
In addition, during the first three months of 2021, we acquired 50,000 shares of
our Class A common stock in a market transaction for
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Future cash requirements -
Liquidity. Our primary source of liquidity on an ongoing basis is our cash flow from operating activities, which is generally used to (i) fund capital expenditures, (ii) repay short-term or long-term indebtedness incurred primarily for capital expenditures, investment activities or reducing our outstanding stock, (iii) provide for the payment of dividends (if declared), and (iv) lend to affiliates. From time-to-time, we will incur indebtedness, primarily to fund capital expenditures or business combinations. Periodically, we evaluate liquidity requirements, alternative uses of capital, capital needs and available resources in view of, among other things, our capital expenditure requirements, dividend policy and estimated future operating cash flows. As a result of this process, we have in the past and may in the future seek to raise additional capital, refinance or restructure indebtedness, issue additional securities, modify our dividend policy or take a combination of such steps to manage our liquidity and capital resources. In the normal course of business, we may review opportunities for acquisitions, joint ventures or other business combinations in the component products industry. In the event of any such transaction, we may consider using available cash, issuing additional equity securities or increasing our indebtedness or that of our subsidiaries. We believe that cash generated from operations together with cash on hand, as well as our ability to obtain external financing, will be sufficient to meet our liquidity needs for working capital, capital expenditures, debt service, dividends (if declared) and any amounts we might loan from time to time under the terms of our revolving loan to Valhi discussed in Note 9 to our Condensed Consolidated Financial Statements (which loans would be solely at our discretion) for both the next 12 months and five years. To the extent that our actual operating results or other developments differ from our expectations, our liquidity could be adversely affected.
All of our
Capital expenditures. Firm purchase commitments for capital projects in process atMarch 31, 2021 totaled$0.5 million . Our 2021 capital investments are primarily expenditures to meet our expected customer demand, improve efficiency and properly maintain our facilities and technology infrastructure. Stock repurchase program. During the first quarter of 2021, we purchased 50,000 shares of our Class A common stock in a market transaction. AtMarch 31, 2021 , we have 627,547 shares available for repurchase under a stock repurchase program authorized by our board of directors. See Note 7 to our Condensed Consolidated Financial Statements.
Commitments and contingencies. There have been no material changes in our contractual obligations since we filed our 2020 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.
Recent accounting pronouncements -
None.
Critical accounting policies -
There have been no changes in the first three months of 2021 with respect to our critical accounting policies presented in Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2020 Annual Report.
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