SEC Form 10-Q filed by CompX International Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended
OR
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
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COMPX INTERNATIONAL INC.
Index
| Page | ||
Part I. | FINANCIAL INFORMATION | ||
Item 1. | Financial Statements | ||
Condensed Consolidated Balance Sheets – December 31, 2023 and March 31, 2024 (unaudited) | - 3 - | ||
- 4 - | |||
- 5 - | |||
- 6 - | |||
Notes to Condensed Consolidated Financial Statements (unaudited) | - 7 - | ||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | - 11 - | ||
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- 16 - | |||
- 18 - | |||
- 18 - |
Items 2, 3, 4 and 5 of Part II are omitted because there is no information to report.
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COMPX INTERNATIONAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31, | March 31, | |||||
ASSETS | 2023 | 2024 | ||||
(unaudited) | ||||||
Current assets: |
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Cash and cash equivalents | $ | | $ | | ||
Marketable securities | | | ||||
Accounts receivable, net |
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Inventories, net |
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Prepaid expenses and other |
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Total current assets |
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Other assets: |
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Note receivable from affiliate |
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Goodwill |
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Other noncurrent assets |
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Total other assets |
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Property and equipment: |
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Land |
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Buildings |
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Equipment |
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Construction in progress |
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Less accumulated depreciation |
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Net property and equipment |
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Total assets | $ | | $ | | ||
LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current liabilities: |
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Accounts payable and accrued liabilities | $ | | $ | | ||
Income taxes payable to affiliate |
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Total current liabilities |
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Noncurrent liabilities: |
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Deferred income taxes | | | ||||
Other | | | ||||
Total noncurrent liabilities | | | ||||
Stockholders' equity: |
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Preferred stock |
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Class A common stock |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive loss - | ( | ( | ||||
Total stockholders' equity |
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Total liabilities and stockholders’ equity | $ | | $ | | ||
Commitments and contingencies (Note 1)
See accompanying Notes to Condensed Consolidated Financial Statements.
- 3 -
COMPX INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share data)
Three months ended | ||||||
March 31, | ||||||
| 2023 |
| 2024 | |||
(unaudited) | ||||||
Net sales | $ | | $ | | ||
Cost of sales |
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Gross margin |
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Selling, general and administrative expense |
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Operating income |
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Interest income |
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Income before income taxes |
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Provision for income taxes |
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Net income | $ | | $ | | ||
Other comprehensive loss, marketable securities adjustment: | ||||||
Unrealized loss arising during year, net | ( | ( | ||||
Comprehensive income | $ | | $ | | ||
Basic and diluted net income per common share | | | ||||
Basic and diluted weighted average shares outstanding |
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See accompanying Notes to Condensed Consolidated Financial Statements.
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COMPX INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
Three months ended March 31, 2023 and 2024 (unaudited) | |||||||||||||||
Accumulated | |||||||||||||||
Class A | Additional | other | Total | ||||||||||||
common | paid-in | Retained | comprehensive | stockholders' | |||||||||||
| stock |
| capital |
| earnings |
| loss | equity | |||||||
Balance at December 31, 2022 | $ | | $ | | $ | | $ | ( | $ | | |||||
Net income |
| — |
| — |
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| — |
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Cash dividends ($ |
| — |
| — |
| ( |
| — |
| ( | |||||
Other comprehensive loss | — | — | — | ( | ( | ||||||||||
Balance at March 31, 2023 | $ | | $ | | $ | | $ | ( | $ | | |||||
Balance at December 31, 2023 | $ | | $ | | $ | | $ | ( | $ | | |||||
Net income |
| — |
| — |
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| — |
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Cash dividends ($ |
| — |
| — |
| ( |
| — |
| ( | |||||
Other comprehensive loss | — | — | — | ( | ( | ||||||||||
Balance at March 31, 2024 | $ | | $ | | $ | | $ | ( | $ | | |||||
See accompanying Notes to Condensed Consolidated Financial Statements.
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COMPX INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three months ended | ||||||
March 31, | ||||||
| 2023 |
| 2024 | |||
(unaudited) | ||||||
Cash flows from operating activities: |
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Net income | $ | | $ | | ||
Depreciation and amortization |
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Deferred income taxes |
| ( |
| ( | ||
Noncash interest income | ( | ( | ||||
Other, net |
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Change in assets and liabilities: |
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Accounts receivable, net |
| ( |
| ( | ||
Inventories, net |
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Accounts payable and accrued liabilities |
| ( |
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Accounts with affiliates |
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Prepaids and other, net |
| ( |
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Net cash provided by operating activities |
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Cash flows from investing activities: |
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Capital expenditures |
| ( |
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Marketable securities: | ||||||
Purchases |
| ( |
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Proceeds from maturities | | | ||||
Note receivable from affiliate: |
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Collections |
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Advances |
| ( |
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Net cash provided by (used in) investing activities |
| ( |
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Cash flows from financing activities: | ||||||
Dividends paid |
| ( |
| ( | ||
Cash and cash equivalents - net change from: | ||||||
Operating, investing and financing activities | ( | | ||||
Balance at beginning of period |
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Balance at end of period | $ | | $ | | ||
Supplemental disclosures - | ||||||
Cash paid for income taxes | $ | | $ | | ||
See accompanying Notes to Condensed Consolidated Financial Statements.
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COMPX INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2024
(unaudited)
Note 1 – Organization and basis of presentation:
Organization. We (NYSE American: CIX) were approximately
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, 2023 that we filed with the Securities and Exchange Commission (“SEC”) on February 28, 2024 (the “2023 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, 2023 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, 2023) 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, 2024 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 2023 Consolidated Financial Statements contained in our 2023 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, 2023, December 31, 2023 and March 31, 2024. The actual dates of our annual and quarterly periods are April 2, 2023, December 31, 2023 and March 31, 2024, 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.
- 7 -
Note 2 – Business segment information:
Three months ended | ||||||
March 31, | ||||||
| 2023 |
| 2024 | |||
(In thousands) | ||||||
Net sales: |
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Security Products | $ | | $ | | ||
Marine Components |
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Total net sales | $ | | $ | | ||
Operating income: |
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Security Products | $ | | $ | | ||
Marine Components |
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Corporate operating expenses |
| ( |
| ( | ||
Total operating income |
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Interest income |
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Income before income taxes | $ | | $ | | ||
Intersegment sales are not material.
n
Note 3 – Marketable securities:
|
| Amortized |
| Unrealized | |||||
| Market value |
| cost basis |
| loss, net | ||||
(In thousands) | |||||||||
December 31, 2023: |
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Current assets | $ | | $ | | $ | ( | |||
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March 31, 2024: | |||||||||
Current assets | $ | | $ | | $ | ( | |||
Our marketable securities consist of investments in debt securities, currently U.S. government treasuries. We classify our marketable securities as available-for-sale. The fair value of our marketable securities is generally determined using Level 2 inputs because although these securities are traded, in many cases the market is not active and the quarter-end valuation is generally based on the last trade of the quarter, which may be several days prior to quarter end. We accumulate unrealized gains and losses on marketable debt securities as part of accumulated other comprehensive income (loss), net of related deferred income taxes.
Note 4 – Accounts receivable, net:
December 31, | March 31, | |||||
| 2023 |
| 2024 | |||
(In thousands) | ||||||
Accounts receivable, net: |
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Security Products | $ | | $ | | ||
Marine Components |
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Allowance for doubtful accounts |
| ( |
| ( | ||
Total accounts receivable, net | $ | | $ | | ||
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Note 5 – Inventories, net:
December 31, | March 31, | |||||
| 2023 |
| 2024 | |||
(In thousands) | ||||||
Raw materials: |
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Security Products | $ | | $ | | ||
Marine Components |
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Total raw materials |
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Work-in-process: |
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Security Products |
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Marine Components |
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Total work-in-process |
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Finished goods: |
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Security Products |
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Marine Components |
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Total finished goods |
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Total inventories, net | $ | | $ | | ||
Note 6 – Accounts payable and accrued liabilities:
December 31, | March 31, | |||||
| 2023 |
| 2024 | |||
(In thousands) | ||||||
Accounts payable: |
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Security Products | $ | | $ | | ||
Marine Components |
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Corporate | — | | ||||
Accrued liabilities: |
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Employee benefits |
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Taxes other than on income |
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Insurance |
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Deferred revenue | | | ||||
Customer tooling |
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Advances from customers | | | ||||
Other |
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Total accounts payable and accrued liabilities | $ | | $ | | ||
Note 7 – Provision for income taxes:
Three months ended | ||||||
March 31, | ||||||
| 2023 |
| 2024 | |||
(In thousands) | ||||||
Expected tax expense, at the U.S. federal statutory | $ | | $ | | ||
State income taxes |
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Other, net |
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Total provision for income taxes | $ | | $ | | ||
Comprehensive provision for income taxes allocable to: | ||||||
Net income | $ | | $ | | ||
Other comprehensive loss - marketable securities | ( | ( | ||||
Total | $ | | $ | | ||
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Note 8 – Financial instruments:
See Note 3 for information on how we determine the fair value of our marketable securities.
The following table presents the financial instruments that are not carried at fair value but which require fair value disclosure:
December 31, 2023 | March 31, 2024 | |||||||||||
Carrying | Fair | Carrying | Fair | |||||||||
| amount |
| value |
| amount |
| value | |||||
(In thousands) | ||||||||||||
Cash and cash equivalents | $ | | $ | | $ | | $ | | ||||
Accounts receivable, net |
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Accounts payable |
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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 under which, as amended, we agreed to loan Valhi up to $
Note 10 – Recent Accounting Pronouncements:
In November 2023, the Financial Accounting Standards Board (“FASB”) issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The ASU requires public companies to disclose significant segment expenses and other segment items on an annual and interim basis. The ASU also mandates public companies to provide all annual segment disclosures currently required annually in interim periods. Public companies will also be required to disclose the title and position of the chief operating decision maker (“CODM”) and explain how the CODM uses the reported measure of segment profit or loss in assessing segment performance and allocation of resources. The ASU is effective for us beginning with our 2024 Annual Report, and for interim reporting, in the first quarter of 2025, with retrospective application required. We are in the process of evaluating the additional disclosure requirements across all segments.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The ASU requires additional annual disclosure and disaggregation for the rate reconciliation, income taxes paid and income tax expense by federal, state and foreign tax jurisdictions. In addition, the standard increases the disclosure requirements for items included in the rate reconciliation that meet a quantitative threshold. The ASU is effective for us beginning with our 2025 Annual Report. The ASU may be applied prospectively; however, entities have the option to apply it retrospectively. We are in the process of evaluating the additional disclosure requirements.
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Business Overview
We are a leading manufacturer of engineered components utilized in a variety of applications and industries. Through our Security Products segment we manufacture mechanical and electrical cabinet locks and other locking mechanisms used in postal, recreational transportation, office and institutional furniture, cabinetry, tool storage and healthcare applications. We also manufacture wake enhancement systems, stainless steel exhaust systems, gauges, throttle controls, trim tabs and related hardware and accessories for the recreational marine and other industries through our Marine Components segment.
General
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Statements in this Quarterly Report that are not historical facts are forward-looking in nature and represent management’s beliefs and assumptions based on currently available information. In some cases, you can identify forward-looking statements by the use of words such as “believes,” “intends,” “may,” “should,” “could,” “anticipates,” “expects” or comparable terminology, or by discussions of strategies or trends. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we do not know if these expectations will be correct. Such statements by their nature involve substantial risks and uncertainties that could significantly impact expected results. Actual future results could differ materially from those predicted. The factors that could cause actual future results to differ materially from those described herein are the risks and uncertainties discussed in this Quarterly Report and those described from time to time in our other filings with the SEC and include, but are not limited to, the following:
| ● | 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, |
| ● | Government laws and regulations and possible changes therein, including new environmental, health, safety, sustainability or other regulations, |
| ● | General global economic and political conditions that disrupt our supply chain, reduce demand or perceived demand for component products 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), |
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| ● | Operating interruptions (including, but not limited to, labor disputes, leaks, natural disasters, fires, explosions, unscheduled or unplanned downtime, transportation interruptions, certain regional and world events or economic conditions and public health crises); |
| ● | Technology related disruptions (including, but not limited to, cyber attacks; software implementation, upgrades or improvements; technology processing failures; or other events) related to our technology infrastructure that could impact our ability to continue operations, or at key vendors which could impact our supply chain, or at key customers which could impact their operations and cause them to curtail or pause orders; 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.
Operating Income Overview
In the first quarter of 2024 operating income decreased to $3.7 million compared to $7.0 million in the first quarter of 2023. The decrease in operating income in the first quarter of 2024 compared to 2023 is primarily due to lower Marine Components sales and gross margin.
We sell a large number of products that have a wide variation in selling price and manufacturing cost, which results in certain practical limitations on our ability to quantify the impact of changes in individual product sales quantities and selling prices on our net sales, cost of sales and gross margin. In addition, small variations in period-to-period net sales, cost of sales and gross margin can result from changes in the relative mix of our products sold.
Results of Operations
| Three months ended |
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March 31, |
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2023 | % | 2024 | % | ||||||||
(Dollars in thousands) |
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Net sales | $ | 41,151 |
| 100.0 | % | $ | 37,971 |
| 100.0 | % | |
Cost of sales |
| 28,447 |
| 69.1 |
| 28,304 |
| 74.5 | |||
Gross margin |
| 12,704 |
| 30.9 |
| 9,667 |
| 25.5 | |||
Operating costs and expenses |
| 5,664 |
| 13.8 |
| 5,952 |
| 15.7 | |||
Operating income | $ | 7,040 |
| 17.1 | % | $ | 3,715 |
| 9.8 | % | |
Net sales. Net sales decreased $3.2 million in the first quarter of 2024 compared to the same period in 2023 due to lower Marine Components sales primarily to the towboat market, partially offset by higher Security Products sales to the government security market. See segment discussion below.
Cost of sales and gross margin. Cost of sales as a percentage of sales increased 5.4% in the first quarter of 2024 compared to the same period in 2023. As a result, gross margin as a percentage of sales decreased over the same period. Gross margin percentage decreased in the first quarter of 2024 compared to the same period in 2023 primarily due to lower gross margin percentages at both Marine Components and Security Products. See segment discussion below.
Operating costs and expenses. Operating costs and expenses consist primarily of sales and administrative-related personnel costs, sales commissions and advertising expenses directly related to product sales and administrative costs relating to business unit and corporate management activities, as well as any gains and losses on property and equipment. Operating costs and expenses for the first quarter of 2024 increased $.3 million compared to the same period in 2023 primarily due to higher employee salaries and benefits at Security Products. Operating costs and expenses as a percentage of net sales increased for the first quarter of 2024 due to the increased operating costs and expenses mentioned above and decreased coverage of operating costs and expenses as a result of lower sales.
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Operating income. As a percentage of net sales, operating income for the first quarter of 2024 decreased compared to the same period of 2023 and was primarily impacted by the factors impacting sales, cost of sales, gross margin and operating costs and expenses. See segment discussion below.
Interest income. Interest income increased $.3 million in the first quarter of 2024 compared to the same period in 2023 primarily due to higher average interest rates and increased investment balances, somewhat offset by lower average balances on the revolving promissory note receivable from Valhi. See Notes 3 and 9 to our Condensed Consolidated Financial Statements.
Provision for income taxes. A tabular reconciliation of our actual tax provision to the U.S. federal statutory income tax rate is included in Note 7 to the Condensed Consolidated Financial Statements. Our operations are wholly within the U.S. and therefore our effective income tax rate is primarily reflective of the U.S. federal statutory rate and applicable state taxes.
Segment Results
The key performance indicator for our segments is operating income.
Three months ended |
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March 31, | % | ||||||||
| 2023 |
| 2024 |
| Change |
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(Dollars in thousands) | |||||||||
Security Products: |
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Net sales | $ | 27,342 | $ | 29,887 |
| 9 | % | ||
Cost of sales |
| 18,875 |
| 21,115 |
| 12 | |||
Gross margin |
| 8,467 |
| 8,772 |
| 4 | |||
Operating costs and expenses |
| 3,088 |
| 3,322 |
| 8 | |||
Operating income | $ | 5,379 | $ | 5,450 |
| 1 | |||
Gross margin |
| 31.0 | % |
| 29.4 | % | |||
Operating income margin |
| 19.7 |
| 18.2 |
| ||||
Security Products. Security Products net sales increased 9% in the first quarter of 2024 compared to the same period last year primarily due to $1.8 million higher sales to the government security market. Gross margin as a percentage of net sales decreased for the first quarter of 2024 compared to the same period in 2023 primarily due to the relative changes in fixed costs allocated to cost of sales during the quarter. Additionally, a less favorable customer and product mix in the first quarter of 2024 negatively impacted gross margin as a percentage of net sales over the comparable period. Operating income as a percentage of net sales decreased in the first quarter of 2024 compared to the same period in 2023 due to the factors impacting gross margin, as well as increased operating costs and expenses, including higher employee salaries and benefits of $.2 million.
Three months ended | |||||||||
March 31, | % | ||||||||
| 2023 |
| 2024 |
| Change |
| |||
(Dollars in thousands) | |||||||||
Marine Components: |
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|
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Net sales | $ | 13,809 | $ | 8,084 |
| (41) | % | ||
Cost of sales |
| 9,572 |
| 7,189 |
| (25) | |||
Gross margin |
| 4,237 |
| 895 |
| (79) | |||
Operating costs and expenses |
| 920 |
| 861 |
| (6) | |||
Operating income | $ | 3,317 | $ | 34 |
| (99) | |||
Gross margin |
| 30.7 | % |
| 11.1 | % | |||
Operating income margin |
| 24.0 |
| .4 |
| ||||
Marine Components. Marine Components net sales decreased 41% in the first quarter of 2024 compared to the same period last year primarily due to the decline in sales to the towboat market. Relative to the first quarter of 2023, sales
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were $4.3 million lower to the towboat market, $.7 million lower to the industrial market, $.3 million lower to the engine builder market and $.3 million lower to distributors. Gross margin as a percentage of net sales decreased in the first quarter of 2024 compared to the same period last year primarily due to higher cost inventory produced during the fourth quarter of 2023 and sold in the first quarter of 2024. Marine Components inventory produced during the fourth quarter of 2023 had a higher carrying value due to higher production cost per unit as a result of lower production volumes. Additionally, gross margin and operating income margin were unfavorably impacted by decreased coverage of production costs, operating costs and expenses on lower sales.
Outlook. In the first quarter of 2024, Security Products benefitted from increased sales of mechanical locks to the government security market while the other markets we serve were relatively flat compared to the same period of 2023. At Marine Components, the decline in sales to the towboat market as a result of the contraction in the recreational marine industry that began late in the first quarter of 2023 has continued. We are focused on aligning our resources with current demand levels, and particularly at Marine Components, we are adjusting inventory levels, operating expenses and labor resources to align with current demand while also preserving our ability to respond quickly when demand increases. Generally, raw material prices have stabilized, our supply chains are stable and transportation and logistical delays are minimal. We have adjusted our order patterns in response to the stability of our raw material supplies.
We expect Security Products sales in 2024 will be lower than 2023 as the sluggishness we have experienced across a variety of the markets Security Products serves has continued through the first quarter of 2024 with customers continuing to express uncertainty regarding sustained consumer demand levels. In addition, we do not expect 2024 sales to benefit from the pilot project to a government security customer we completed largely in the fourth quarter of 2023. After implementing aggressive price increases over the last several years to maintain operating margins, we expect only modest price increases in 2024. Overall, we expect Security Products gross margin will be comparable to 2023, although we expect operating income as a percentage of sales to decline due to our limited pricing power along with reduced coverage of selling, general and administrative costs as a result of lower expected sales. We expect Marine Components net sales for the full year of 2024 to be lower as compared to 2023 because we believe demand in the towboat market will further decline. The recreational marine industry faces strong headwinds due to higher interest rates and broader market weakness. Several original equipment boat manufacturers, including certain of our customers, have publicly announced reduced production schedules for 2024. Overall, we expect Marine Components gross margin as a percentage of net sales for 2024 to be lower than 2023 due to lower coverage of fixed overhead as a result of lower expected sales, and operating income as a percentage of net sales will similarly be lower as a result of reduced coverage of selling, general and administrative expenses due to lower expected sales. We ended 2023 with elevated inventory balances at our Marine Components segment as a result of increased orders of certain raw materials due to previously long lead times coupled with the rapidly changing towboat demand which created a misalignment of our raw materials with near term demand. We made significant progress in aligning our Marine Components inventory balances with current demand in the first quarter of 2024 and expect this alignment to be complete by mid-year 2024.
Our expectations for our operations and the markets we serve are based on a number of factors outside our control. We have experienced global and domestic supply chain challenges, and any future impacts on our operations will depend on, among other things, any future disruption in our operations or our suppliers’ operations, the impact of economic conditions and geopolitical events on demand for our products or our customers’ and suppliers’ operations, all of which remain uncertain and cannot be predicted.
Liquidity and Capital Resources
Consolidated cash flows –
Operating activities. Trends in cash flows from operating activities, excluding changes in assets and liabilities, have generally been similar to the trends in operating earnings. Changes in assets and liabilities result primarily from the timing of production, sales and purchases. Changes in assets and liabilities generally tend to even out over time. However, period-to-period relative changes in assets and liabilities can significantly affect the comparability of cash flows from operating activities.
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Our net cash provided by operating activities for the first three months of 2024 decreased by $1.4 million as compared to the first three months of 2023. The decrease in net cash provided is primarily due to the net effects of:
| ● | A $3.3 million decrease in operating income in 2024, |
| ● | A $1.6 million decrease in the amount of net cash used by relative changes in our inventories, receivables, prepaids, payables and non-tax related accruals in 2024, and |
| ● | A $.3 million increase in interest received in 2024 due to higher interest rates and increased investment balances, partially offset by lower average balances on our loan to an affiliate. |
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, 2023 to March 31, 2024 varied by segment primarily as a result of relative changes in the timing of sales and collections relative to the end of the quarter. For comparative purposes, we have provided December 31, 2022 and March 31, 2023 numbers below.
December 31, | March 31, | December 31, | March 31, | |||||
Days Sales Outstanding: |
| 2022 |
| 2023 |
| 2023 |
| 2024 |
Security Products |
| 45 Days |
| 44 Days | 37 Days |
| 43 Days | |
Marine Components |
| 30 Days |
| 36 Days | 31 Days |
| 35 Days | |
Consolidated CompX |
| 41 Days |
| 41 Days | 36 Days |
| 42 Days |
Our average number of days in inventory decreased from December 31, 2023 to March 31, 2024 primarily due to the decrease at Marine Components as a result of higher sales in the first quarter of 2024 compared to the fourth quarter of 2023 and decreased inventory balances as a result of a planned reduction of certain raw materials with previously longer lead times as discussed in Outlook above. For comparative purposes, we have provided December 31, 2022 and March 31, 2023 numbers below.
December 31, | March 31, | December 31, | March 31, | ||||||
Days in Inventory: |
| 2022 |
| 2023 |
| 2023 |
| 2024 | |
Security Products |
| 101 Days |
| 102 Days | 77 Days |
| 82 Days | ||
Marine Components |
| 95 Days |
| 87 Days | 175 Days |
| 108 Days | ||
Consolidated CompX |
| 99 Days |
| 97 Days | 95 Days |
| 89 Days |
Investing activities. Our capital expenditures were $.3 million in each of the first three months of 2024 and 2023, respectively. During the first three months of 2024, Valhi repaid a net $.8 million under the promissory note ($5.2 million of gross borrowings and $6.0 million of gross repayments). During the first three months of 2023, Valhi repaid a net $1.0 million under the promissory note ($6.8 million of gross borrowings and $7.8 million of gross repayments). See Note 9 to our Condensed Consolidated Financial Statements.
During the first three months of 2024, we received gross proceeds totaling $12.0 million related to U.S. treasury bill maturities. During the first three months of 2023, we had gross purchases of U.S. treasury marketable securities aggregating $13.5 million and received gross proceeds totaling $4.0 million related to U.S. treasury bill maturities. See Note 3 to our Condensed Consolidated Financial Statements.
Financing activities. Financing activities consisted only of quarterly cash dividends. In February 2024, our board of directors increased our regular quarterly dividend from $.25 per share to $.30 per share beginning in the first quarter of 2024. 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 –
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.
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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 $75.6 million aggregate cash, cash equivalents and marketable securities at March 31, 2024 were held in the U.S.
Capital expenditures. Firm purchase commitments for capital projects in process at March 31, 2024 totaled $.4 million. We expect our capital expenditures for 2024 will be approximately $2.8 million primarily to meet our existing customer demand and those required to properly maintain our facilities and technology infrastructure.
Stock repurchase program. At March 31, 2024, we have 523,647 shares available for repurchase under a stock repurchase program authorized by our board of directors.
Commitments and contingencies. There have been no material changes in our contractual obligations since we filed our 2023 Annual Report and we refer you to that report for a complete description of these commitments.
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 2024 with respect to our critical accounting policies presented in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2023 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 2023 Annual Report, and we refer you to Part I, Item 7A – “Quantitative and Qualitative Disclosure About Market Risk” in our 2023 Annual Report. See also Note 8 to our Condensed Consolidated Financial Statements.
ITEM 4.CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures which, as defined in Exchange Act Rule 13a-15(e), means controls and other procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit to the SEC under the Securities Exchange Act of 1934, as amended (the “Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit to the SEC under the Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions to be made regarding required disclosure. Our management with the participation of Scott C. James, our President and Chief Executive Officer, and Amy
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A. Samford, our Executive Vice President and Chief Financial Officer, has evaluated the design and operating effectiveness of our disclosure controls and procedures as of March 31, 2024. 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, |
| ● | 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, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Part II. OTHER INFORMATION
ITEM 1A.Risk Factors.
Reference is made to the 2023 Annual Report for a discussion of risk factors related to our businesses.
ITEM 6.Exhibits.
Item No. |
| Exhibit Index |
|---|---|---|
31.1 | ||
31.2 | ||
32.1 | ||
101.INS | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
101.SCH | Inline XBRL Taxonomy Extension Schema | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase | |
104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
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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, 2024 | By: | /s/ Amy A. Samford | |
Amy A. Samford | |||
Executive Vice President and Chief Financial Officer | |||
By: | /s/ Amy E. Ruf | ||
Amy E. Ruf | |||
Vice President and Controller | |||
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