Segment Results
The key performance indicator for our segments is their operating income
.
|
Three months ended
September 30,
|
|
|
|
|
Nine months ended
September 30,
|
|
|
|
|
2012
|
|
|
2013
|
|
|
% Change
|
|
2012
|
|
|
2013
|
|
|
% Change
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security Products
|
$
|
|
18,873
|
|
|
|
|
$
|
|
21,457
|
|
|
|
|
|
|
|
14
|
%
|
|
$
|
|
56,315
|
|
|
$
|
|
61,258
|
|
|
|
|
|
9
|
%
|
Marine Components
|
|
|
2,408
|
|
|
|
|
|
|
2,752
|
|
|
|
|
|
|
|
14
|
%
|
|
|
|
7,541
|
|
|
|
|
8,443
|
|
|
|
|
|
12
|
%
|
Total net sales
|
$
|
|
21,281
|
|
|
|
|
$
|
|
24,209
|
|
|
|
|
|
|
|
14
|
%
|
|
$
|
|
63,856
|
|
|
$
|
|
69,701
|
|
|
|
|
|
9
|
%
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security Products
|
$
|
|
6,012
|
|
|
|
|
$
|
|
7,037
|
|
|
|
|
|
|
|
17
|
%
|
|
$
|
|
17,613
|
|
|
$
|
|
19,476
|
|
|
|
|
|
11
|
%
|
Marine Components
|
|
|
298
|
|
|
|
|
|
|
477
|
|
|
|
|
|
|
|
60
|
%
|
|
|
|
1,218
|
|
|
|
|
1,668
|
|
|
|
|
|
37
|
%
|
Total gross profit
|
|
|
6,310
|
|
|
|
|
|
|
7,514
|
|
|
|
|
|
|
|
19
|
%
|
|
$
|
|
18,831
|
|
|
$
|
|
21,144
|
|
|
|
|
|
12
|
%
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security Products
|
$
|
|
3,758
|
|
|
|
|
$
|
|
4,578
|
|
|
|
|
|
|
|
22
|
%
|
|
$
|
|
10,899
|
|
|
$
|
|
12,245
|
|
|
|
|
|
12
|
%
|
Marine Components
|
|
|
(181
|
|
)
|
|
|
|
|
(17
|
|
|
)
|
|
|
|
|
91
|
%
|
|
|
|
(330
|
|
)
|
|
|
|
185
|
|
|
|
|
|
156
|
%
|
Corporate operating expense
|
|
|
(1,942
|
|
)
|
|
|
|
|
(1,584
|
|
|
)
|
|
|
|
|
18
|
%
|
|
|
|
(5,193
|
|
)
|
|
|
|
(5,076
|
|
)
|
|
|
|
|
2
|
%
|
Total operating income
|
$
|
|
1,635
|
|
|
|
|
$
|
|
2,977
|
|
|
|
|
|
|
|
82
|
%
|
|
$
|
|
5,376
|
|
|
$
|
|
7,354
|
|
|
|
|
|
37
|
%
|
Gross profit margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security Products
|
|
|
32
|
|
%
|
|
|
|
|
33
|
|
|
%
|
|
|
|
|
|
|
|
|
31
|
|
%
|
|
|
|
32
|
|
%
|
|
|
|
|
|
Marine Components
|
|
|
12
|
|
%
|
|
|
|
|
17
|
|
|
%
|
|
|
|
|
|
|
|
|
16
|
|
%
|
|
|
|
20
|
|
%
|
|
|
|
|
|
Total gross profit margin
|
|
|
30
|
|
%
|
|
|
|
|
31
|
|
|
%
|
|
|
|
|
|
|
|
|
29
|
|
%
|
|
|
|
30
|
|
%
|
|
|
|
|
|
Operating income margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security Products
|
|
|
20
|
|
%
|
|
|
|
|
21
|
|
|
%
|
|
|
|
|
|
|
|
|
19
|
|
%
|
|
|
|
20
|
|
%
|
|
|
|
|
|
Marine Components
|
|
|
(8
|
|
)%
|
|
|
|
|
(1
|
|
|
)%
|
|
|
|
|
|
|
|
|
(4
|
|
)%
|
|
|
|
2
|
|
%
|
|
|
|
|
|
Total operating income margin
|
|
|
8
|
|
%
|
|
|
|
|
12
|
|
|
%
|
|
|
|
|
|
|
|
|
8
|
|
%
|
|
|
|
10
|
|
%
|
|
|
|
|
|
Security Products
. Security Products net sales increased 14% in the third quarter and 9% in the first nine months of 2013 compared to the same periods last year. The increase in sales is primarily due to an increase in sales to certain high security pin tumbler lock customers of $2.2 million and $5.3 million in the third quarter and nine month period. Growth of our Security Products segment was aided by our ongoing efforts to diversify our products and customers.
14
Gross profit margin and operating income as a percentage of sales increased approximately 1% in the third quarter and for the first nine months of 2013 compared to the same periods in 2012 primarily due to improved cost efficiencies from higher sales, partially offset by higher self-insured medical expenses over both comparative periods. Medical expense increased $142,000 in the third quarter of 2013 compared to the same period in 2012, $128,000 of which impacted cost of goods sold and $14,000 of which impacted selling and administration expenses. For the nine month comparative period, medical expense increased $274,000 in 2013, $232,000 of which impacted cost of goods sold and $42,000 of which impacted selling and administration expenses.
Marine Components
. Marine Components net sales increased 14% and 12% for the third quarter and nine month periods in 2013 compared to the same periods in the prior year. The increase in sales is primarily due to gains in market share for products sold to the ski/wakeboard towboat market and other non-high performance marine markets. Gross profit margin for the third quarter of 2013 increased 5% compared to the third quarter of 2012 and improved 4% for the nine month period as compared to the prior year. Operating income margin increased for the third quarter and nine month periods of 2013 by 7% and 6%, respectively, compared to the same periods in 2012. The gross profit margin and the operating income margin increased primarily due to increased leverage of fixed costs as a result of the higher sales.
Outlook
. Consistent with the current state of the North American economy, overall demand from our customers continues to be subject to instability. While we experienced a total increase in sales in the first nine months of 2013, this was the net result of sales growth in certain markets and flat or slightly decreased sales in other markets. As a result, we are uncertain as to the extent that total sales will continue to grow for the remainder of 2013 and into 2014. While changes in market demand are not within our control, we are focused on the areas we can impact. Staffing levels are continuously evaluated in relation to sales order rates which may result in headcount adjustments, to the extent possible, to match staffing levels with demand. We expect our continuous lean manufacturing and cost improvement initiatives to positively impact our productivity and result in a more efficient infrastructure. Additionally, we continue to seek opportunities to gain market share in markets we currently serve, to expand into new markets and to develop new product features in order to broaden our sales base and mitigate the impact of changes in demand.
Volatility in the costs of commodity raw materials is ongoing. Our primary commodity raw materials are zinc, brass and stainless steel, which together represent approximately 10% of our total cost of goods sold. We generally seek to mitigate the impact of fluctuations in commodity raw material costs on our margins through improvements in production efficiencies or other operating cost reductions. In the event we are unable to offset commodity raw material cost increases with other cost reductions, it may be difficult to recover those cost increases through increased product selling prices or surcharges due to the competitive nature of the markets served by our products. Consequently, overall operating margins may be negatively affected by commodity raw material cost pressures.
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. The September 30, 2013 Consolidated Statement of Cash Flows has not been revised for discontinued operations. See Note 2 to our Condensed Consolidated Financial Statements.
Our net cash used by operating activities was $7.9 million for the first nine months of 2013 as compared to $6.4 million of net cash provided by operating activities for the first nine months of 2012. The net $14.3 million increase in cash used by operating activities is primarily due to the net effects of:
·
|
The negative impact of higher net cash paid for taxes in 2013 of $10.2 million for income taxes associated with our tax gain realized on the sale of our disposed operations recognized in the fourth quarter of 2012 and on the 2012 income of the disposed operations;
|
·
|
The negative impact of higher net cash used by relative changes in our inventories, receivables, payables and non-tax related accruals attributable to our continuing operations of $3.4 million in 2013; and
|
·
|
The negative impact of net cash provided by operating activities attributable to our discontinued operations in 2012 of $4.0 million, (exclusive of the impact of cash paid for income taxes in 2012 attributable to our discontinued operations, as discussed above).
|
15
We expect our year-to-date cash flows from operating activities will continue to result in a net use of cash in 2013 primarily due to the first quarter cash payment for income taxes we made of approximately $11.6 million related to the sale of our disposed operations. Under GAAP, cash paid for income taxes on the disposal of a business unit is reported as a reduction of cash flows from operating activities, while the pre-tax proceeds from disposal are reported as a component of cash flows from investing activities. In addition, operating cash flow comparisons in 2013 will continue to be negatively impacted by such disposal, since the operating cash flows of the disposed operations are included in our total cash flows from operating activities in 2012, through the December 2012 date of sale. See Note 2 to our Condensed Consolidated Financial Statements.
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 was comparable from December 31, 2012 to September 30, 2013. Marine Components can experience greater variability in their average days sales outstanding due to their smaller size, however, their receivable balances are not significant. Overall, our September 30, 2013 average days sales outstanding compared to December 31, 2012 is in line with our expectations. For comparative purposes, we have provided December 31, 2011 and September 30, 2012 numbers below.
Days Sales Outstanding:
|
|
December 31, 2011
|
|
September 30, 2012
|
|
December 31, 2012
|
|
September 30, 2013
|
Security Products
|
|
39 Days
|
|
41 Days
|
|
41 Days
|
|
40 Days
|
Marine Components
|
|
44 Days
|
|
37 Days
|
|
32 Days
|
|
37 Days
|
Consolidated CompX**
|
|
40 Days
|
|
41 Days
|
|
40 Days
|
|
40 Days
|
**
|
Excludes
discontinued operations. See Note 2 to our Condensed Consolidated Financial Statements.
|
As shown below, our total average number of days in inventory decreased from December 31, 2012 to September 30, 2013. The variability in days in inventory among our segments primarily relates to the differences in the complexity of the production processes and therefore the length of time it takes to produce end-products. Our overall September 30, 2013 average days in inventory compared to December 31, 2012 is in line with our expectations. For comparative purposes, we have provided December 31, 2011 and September 30, 2012 numbers below.
Days in Inventory:
|
|
December 31, 2011
|
|
September 30, 2012
|
|
December 31, 2012
|
|
September 30, 2013
|
Security Products
|
|
79 Days
|
|
67 Days
|
|
71 Days
|
|
67 Days
|
Marine Components
|
|
115 Days
|
|
87 Days
|
|
91 Days
|
|
91 Days
|
Consolidated CompX**
|
|
83 Days
|
|
69 Days
|
|
74 Days
|
|
70 Days
|
**
|
Excludes discontinued operations. See Note 2 to the Condensed Consolidated Financial Statements.
|
Investing activities
. Net cash provided by investing activities was $1.9 million in the first nine months of 2013 compared to net cash used of $3.1 million in the first nine months of 2012. The significant items impacting the increase in net cash provided by investing activities in 2013 over net cash used in 2012 are as follows:
During 2013,
·
|
We collected $3.0 million in principal payments on a note receivable; and
|
·
|
We received $1.6 million in net proceeds on the sale of an asset held for sale.
|
See Notes 2 and 6 to our Condensed Consolidated Financial Statements, respectively.
Financing activities.
Net cash used in financing activities was $21.3 million in the first nine months of 2013 compared to net cash used of $6.5 million in the first nine months of 2012. The change is primarily a result of the following items:
·
|
Aggregate dividends we paid in the first nine months of 2013 were $1.9 million lower as compared to the same period in 2012 as a result of reducing our regular quarterly dividend from $0.125 per share to $0.05 per share beginning in the second quarter of 2013; and
|
·
|
In the third quarter of 2013, we prepaid the remaining outstanding principal on our long-term debt, plus accrued interest, without penalty. Debt repayments related to principal for the first nine months of 2013 totalled $18.5 million compared to $1.8 million in 2012.
|
16
See Note 8 to our Condensed Consolidated Financial Statements.
Future cash requirements
Liquidity
. Our primary source of liquidity on an on-going basis is our cash flows 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 and (iii) provide for the payment of dividends (if declared). From time-to-time, we will incur indebtedness, primarily to fund capital expenditures or business combinations. 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.
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 and dividends (if declared) for both the next 12 months and five years. To the extent that our actual operating results or other developments differ materially from our expectations, our liquidity could be adversely affected.
All of the $36.6 million aggregate cash and cash equivalents at September 30, 2013 were held in the U.S.
Capital Expenditures.
Firm purchase commitments for capital projects in process at September 30, 2013 totaled $549,000. Our 2013 capital investments are limited to those expenditures required to meet our expected customer demand and those required to properly maintain or improve our facilities and technology infrastructure.
Commitments and Contingencies.
There have been no material changes in our contractual obligations since we filed our 2012 Annual Report (other than the prepayment of our outstanding long-term debt in July 2013, as discussed above), and we refer you to that report for a complete description of these commitments.
Off-balance sheet financing arrangements
We do not have any off-balance sheet financing agreements other than the operating leases discussed in our 2012 Annual Report.
Recent accounting pronouncements
Not applicable.
Critical accounting policies
There have been no changes in the first nine months of 2013 with respect to our critical accounting policies presented in Managements Discussion and Analysis of Financial Condition and Results of Operations in our 2012 Annual Report.
17
Forward-looking information
As provided by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, we caution that the statements in this Quarterly Report on Form 10-Q relating to matters that are not historical facts are forward-looking statements that represent our beliefs and assumptions based on currently available information. Forward-looking statements can be identified by the use of words such as believes, intends, may, should, 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 our expectations will prove to be correct. Such statements by their nature involve substantial risks and uncertainties that could significantly impact expected results, and actual future results could differ materially from those described in such forward-looking statements. Among the factors that could cause actual future results to differ materially are the risks and uncertainties discussed in this Quarterly Report and those described from time to time in our other filings with the Securities and Exchange Commission. While it is not possible to identify all factors, we continue to face many risks and uncertainties including, but not limited to the following:
·
|
Future demand for our products,
|
·
|
Changes in our raw material and other operating costs (such as zinc, brass and energy costs) and our ability to pass those costs on to our customers or offset them with reductions in other operating costs,
|
·
|
Price and product competition from low-cost manufacturing sources (such as China),
|
·
|
The impact of pricing and production decisions,
|
·
|
Customer and competitor strategies including substitute products,
|
·
|
Uncertainties associated with the development of new product features,
|
·
|
Potential difficulties in integrating future acquisitions,
|
·
|
The impact of current or future government regulations (including employee healthcare benefit related regulations),
|
·
|
Potential difficulties in implementing new manufacturing and accounting software systems,
|
·
|
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,
|
·
|
General global economic and political conditions that introduce instability into the U.S. economy (such as changes in the level of gross domestic product in various regions of the world),
|
·
|
Operating interruptions (including, but not limited to labor disputes, hazardous chemical leaks, natural disasters, fires, explosions, unscheduled or unplanned downtime and transportation interruptions); 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.