NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013
Note 1
–
Summary of significant accounting policies:
Organization
.
We (NYSE MKT: CIX) are 87% owned by NL Industries, Inc. (NYSE: NL) at December 31, 2013. We manufacture and sell component products (security products and recreational marine components). At December 31, 2013, (i) Valhi, Inc. owns approximately 83% of NL’s outstanding common stock and (ii) Contran Corporation and its subsidiaries own an aggregate of 94% of Valhi’s outstanding common stock. Substantially all of Contran’s outstanding voting stock is held by family trusts established for the benefit of Lisa K. Simmons and Serena Simmons Connelly, daughters of Harold C. Simmons, and their children (for which Ms. Lisa Simmons and Ms. Connelly are co- trustees) or is held directly by Ms. Lisa Simmons and Ms. Connelly or persons or entities related to them, including their step-mother Annette C. Simmons, the widow of Mr. Simmons. Prior to his death in December 2013, Mr. Simmons served as sole trustee of the family trusts. Under a voting agreement entered into in February 2014 by all of the voting stockholders of Contran, the size of the board of directors of Contran was fixed at five members, each of Ms. Lisa Simmons, Ms. Connelly and Ms. Annette Simmons have the right to designate one of the five members of the Contran board and the other two members of the Contran board must consist of members of Contran management. Ms. Lisa Simmons, Ms. Connelly, and Ms. Annette Simmons each serve as members of the Contran board. The voting agreement expires in February 2017 (unless Ms. Lisa Simmons, Ms. Connelly and Ms. Annette Simmons otherwise mutually agree), and the ability of Ms. Lisa Simmons, Ms. Connelly, and Ms. Annette Simmons to each designate one member of the Contran board is dependent upon each of their continued beneficial ownership of at least 5% of the combined voting stock of Contran. Consequently, Ms. Lisa Simmons, Ms. Connelly and Ms. Annette Simmons may be deemed to control Contran, Valhi, NL and us.
Unless otherwise indicated, references in this report to “we,” “us,” or “our” refer to CompX International Inc. and its subsidiaries, taken as a whole.
Management estimates.
In preparing our financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at each balance sheet date and the reported amounts of our revenues and expenses during each reporting period. Actual results may differ significantly from previously estimated amounts under different assumptions or conditions.
Principles of consolidation
.
Our consolidated financial statements include the accounts of CompX International Inc. and our wholly-owned subsidiaries. We eliminate all material intercompany accounts and balances.
Fiscal year.
Our fiscal year end is always the Sunday closest to December 31, and our operations are reported on a 52 or 53-week fiscal year. Each of the years ended December 31, 2011, 2012, and 2013 consisted of 52 weeks.
Translation of foreign currencies
.
We translate the assets and liabilities of our subsidiaries whose functional currency is not the U.S. dollar at year-end rates of exchange, while we translate their revenues and expenses at average exchange rates prevailing during the year. We accumulate the resulting translation adjustments in stockholders’ equity as part of accumulated other comprehensive income, net of related deferred income taxes. We recognize currency transaction gains and losses in income. In December 2012, we sold our Furniture Components segment, which comprised all of our subsidiaries whose functional currency was not the U.S. dollar. See Note 2.
Cash and cash equivalents
.
We classify as cash and cash equivalents bank time deposits and government and commercial notes and bills with original maturities of three months or less.
Net sales
.
We record sales when products are shipped and title and other risks and rewards of ownership have passed to the customer. Amounts charged to customers for shipping and handling are not material.
F-10
Sales are stated net of price, early payment and distributor discounts and volume rebates. We report any tax assessed by a governmental authority that we collect from our customers that is both imposed on and concurrent with our revenue producing activities (such as sales and use taxes) on a net basis (meaning we do not recognize these taxes either in our revenues or in our costs and expenses).
Accounts receivable.
We provide an allowance for doubtful accounts for known and estimated potential losses rising from our sales to customers based on a periodic review of these accounts.
Inventories and cost of sales
.
We state inventories at the lower of cost or market, net of allowance for obsolete and slow-moving inventories. We generally base inventory costs for all inventory categories on average cost that approximates the first-in, first-out method. Inventories include the costs for raw materials, the cost to manufacture the raw materials into finished goods and overhead. Depending on the inventory’s stage of completion, our manufacturing costs can include the costs of packing and finishing, utilities, maintenance and depreciation, shipping and handling, and salaries and benefits associated with our manufacturing process. We allocate fixed manufacturing overheads based on normal production capacity. Unallocated overhead costs resulting from periods with abnormally low production levels are charged to expense as incurred. As inventory is sold to third parties, we recognize the cost of sales in the same period that the sale occurs. We periodically review our inventory for estimated obsolescence or instances when inventory is no longer marketable for its intended use, and we record any write-down equal to the difference between the cost of inventory and its estimated net realizable value based on assumptions about alternative uses, market conditions and other factors.
Selling, general and administrative expenses; advertising costs
.
Selling, general and administrative expenses include costs related to marketing, sales, distribution, research and development and administrative functions such as accounting, treasury and finance, and includes costs for salaries and benefits, travel and entertainment, promotional materials and professional fees. We expense advertising and research and development costs as incurred. Advertising costs related to continuing operations were not significant in 2011, 2012 or 2013.
Goodwill.
Goodwill represents the excess of cost over fair value of individual net assets acquired in business combinations. Goodwill is not subject to periodic amortization. We amortize other intangible assets, consisting principally of certain acquired patents and tradenames, using the straight line method over their estimated lives and state them net of accumulated amortization. We evaluate goodwill for impairment, annually, or when circumstances indicate the carrying value may not be recoverable. In September 2011, the Financial Accounting Standards Board issued ASU No. 2011-08, which provided new guidance on testing goodwill for impairment. The new guidance allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity is no longer required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment considering the totality of relevant events and circumstances, that it is more likely than not that its fair value of the reporting unit is less than its carrying amount. We adopted this accounting standard in the third quarter of 2013. See Note 6.
Property and equipment; depreciation expense
.
We state property and equipment, including purchased computer software for internal use, at cost. We compute depreciation of property and equipment for financial reporting purposes principally by the straight-line method over the estimated useful lives of 15 to 40 years for buildings and 3 to 20 years for equipment and software. We use accelerated depreciation methods for income tax purposes, as permitted. Depreciation expense related to continuing operations was $3.5 million in 2011, $3.1 million in 2012, and $3.2 million in 2013. Upon sale or retirement of an asset, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is recognized in income currently. Expenditures for maintenance, repairs and minor renewals are expensed; expenditures for major improvements are capitalized.
We perform impairment tests when events or changes in circumstances indicate the carrying value may not be recoverable
. We consider all relevant factors. We perform the impairment test by comparing the estimated future undiscounted cash flows associated with the asset to the asset’s net carrying value to determine if impairment exists.
Employee benefit plans.
We maintain various defined contribution plans in which we make contributions based on matching or other formulas. Defined contribution plan expense related to continuing operations approximated $1.7 million in 2011, $1.8 million in 2012 and $2.0 million in 2013.
F-11
Self-insurance.
We are partially self-insured for workers’ compensation and certain employee health benefits and self-insured for most environmental issues. We purchase coverage in order to limit our exposure to any significant levels of workers’ compensation or employee health benefit claims. We accrue self-insured losses based upon estimates of the aggregate liability for uninsured claims incurred using certain actuarial assumptions followed in the insurance industry and our own historical claims experience.
Derivatives and hedging activities
.
We recognize derivatives as either an asset or liability measured at fair value in accordance with ASC Topic 815,
Derivatives and Hedging
. We recognize the effect of changes in the fair value of derivatives either in net income or other comprehensive income, depending on the intended use of the derivative. In December 2012, we sold our Furniture Components segment, which was our only segment that utilized derivatives from time to time. See Note 2.
Income taxes
.
We, and our parent NL, are members of the Contran Tax Group. We have been and currently are a part of the consolidated tax returns filed by Contran in certain United States state jurisdictions. As a member of the Contran Tax Group, we are jointly and severally liable for the federal income tax liability of Contran and the other companies included in the Contran Tax Group for all periods in which we are included in the Contran Tax Group. See Note 13.
As a member of the Contran Tax Group, we are a party to a tax sharing agreement which provides that we compute our provision for U.S. income taxes on a separate-company basis
. Pursuant to the tax sharing agreement, we make payments to or receive payments from NL in amounts we would have paid to or received from the U.S. Internal Revenue Service or the applicable state tax authority had we not been a member of the Contran Tax Group. The separate company provisions and payments are computed using the tax elections made by Contran. Under certain circumstances, such tax elections could require Contran to treat items differently than we would on a stand alone basis, and in such instances GAAP requires us to conform to Contran’s tax election. We made net cash payments for income taxes to NL of $3.7 million in 2011, $1.2 million in 2012, and $14.1 million in 2013.
Deferred income tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the income tax and financial reporting carrying amounts of assets and liabilities, including undistributed earnings of foreign subsidiaries that
are not permanently reinvested. In December 2012, we sold our Furniture Components segment, which comprised all of our non-U.S. operating subsidiaries. See Note 2. We periodically evaluate our deferred tax assets in the various taxing jurisdictions in which we operate and adjust any related valuation allowance based on the estimate of the amount of deferred tax assets which we believe do not meet the more-likely-than-not recognition criteria. See Note 10.
We record a reserve for uncertain tax positions for tax positions where we believe it is more-likely-than-not our position will not prevail with the applicable tax authorities
. Our reserve for uncertain tax positions was nil in each of 2012 and 2013.
Earnings per share
.
Basic earnings per share of common stock is computed using the weighted average number of common shares actually outstanding during each period. Diluted earnings per share of common stock includes the impact of outstanding dilutive stock options. The weighted average number of outstanding stock options excluded from the calculation of diluted earnings per share because their impact would have been antidilutive aggregated approximately 9,200 in 2011. There were no outstanding stock options during 2012 or 2013.
Note 2
–
Discontinued operations:
In December 2012, we completed the sale of our Furniture Components segment
for proceeds (net of expenses) of approximately $58.0 million in cash. We recognized a pre-tax gain of approximately $29.6 million on the disposal of these operations ($27.6 million, net of income taxes of approximately $1.9 million). Such pre-tax gain includes income of $12.7 million associated with the reclassification out of accumulated other comprehensive income related to foreign currency translation. The income taxes associated with the pre-tax gain on disposal is significantly less than the U.S. statutory income tax rate of 35% principally due to the utilization of foreign tax credits, the benefit of which had previously not been recognized in part because such benefit did not meet the “more-likely-than-not” recognition criteria and in part because we have not previously elected to claim a credit with
F-12
respect to foreign income taxes paid because our tax elections are consistent with the elections of Contran and Contran had not previously elected to claim a credit. Our Furniture Components segment primarily sold products with lower average margins and higher commodity raw material content than other segments of our business. We believe disposing of our furniture components segment has enabled us to focus more effort on continuing to develop the remaining portion of our business that we believe has greater opportunity for higher returns and with less volatility in the cost of commodity raw materials.
Selected financial data for the operations of the disposed Furniture Components segment is presented below:
|
|
Years ended December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
|
(In thousands)
|
|
Net sales
|
|
$
|
59,021
|
|
|
$
|
60,722
|
|
Operating income
|
|
$
|
9,061
|
|
|
$
|
7,364
|
|
Other income, net
|
|
|
66
|
|
|
|
25
|
|
Interest expense
|
|
|
(82
|
)
|
|
|
(105
|
)
|
Income before income taxes
|
|
|
9,045
|
|
|
|
7,284
|
|
Income tax expense
|
|
|
(4,876
|
)
|
|
|
(3,484
|
)
|
Net income
|
|
$
|
4,169
|
|
|
$
|
3,800
|
|
In accordance with generally accepted accounting principles, the assets and liabilities relating to the Furniture Components segment were eliminated from the 2012 Consolidated Balance Sheet at the date of sale
. We have reclassified our Consolidated Statements of Income to reflect the disposed operations as discontinued operations for all periods presented. We have not reclassified our December 31, 2011 or 2012 Consolidated Statements of Cash Flows to reflect discontinued operations.
In conjunction with the sale of our Furniture Components segment, the buyer was not interested in retaining certain undeveloped land located in Taiwan owned by our Taiwanese Furniture Component subsidiary
. We had no additional use for the undeveloped land in Taiwan and therefore expected the land to be sold to a third party with CompX receiving the net proceeds. Based on the legal form of how we completed the disposal transaction, our interest in such land was represented by a $3.0 million promissory note receivable at December 31, 2012, issued to us by our former Taiwanese subsidiary which retained legal ownership in the land to facilitate the future sale of the land to a third party. The proceeds from the sale of the land were required to be used to settle the note receivable. In 2013 an agreement was entered into with a third party to sell the land for $3.0 million, all of which was received during 2013. The note receivable was classified as part of prepaids and other current assets in our Consolidated Balance Sheet at December 31, 2012.
Note 3
–
Business and geographic segments:
Our operating segments are defined as components of our continuing operations about which separate financial information is available that is regularly evaluated by our chief operating decision maker in determining how to allocate resources and in assessing performance
. At December 31, 2013, we had two operating segments – Security Products and Marine Components. In December 2012, we sold our Furniture Components segment. See Note 2.
The Security Products segment, with a facility in South Carolina and a facility shared with Marine Components in Illinois, manufactures locking mechanisms and other security products for sale to the transportation, postal, office and institutional furniture, cabinetry, tool storage, healthcare and other industries
.
Our Marine Components segment, with a facility in Wisconsin and a facility shared with Security Products in Illinois, manufactures and distributes stainless steel exhaust systems, gauges and throttle controls primarily for recreational boats
.
F-13
The chief operating decision maker evaluates segment performance based on segment operating income, which is defined as income before income taxes and interest expense, exclusive of certain general corporate income and expense items (primarily interest income) and certain non-recurring items (such as gains or losses on the disposition of business units and other l
ong-lived assets outside the ordinary course of business). The accounting policies of the reportable operating segments are the same as those described in Note 1. Capital expenditures include additions to property and equipment, but exclude amounts attributable to business combinations.
Segment assets are comprised of all assets attributable to the reportable segments.
Corporate assets are not attributable to the operating segments and consist primarily of cash (including cash generated from the sale of disposed operations in December 2012), cash equivalents, notes receivable and assets held for sale. See Note 7. For geographic information, the point of origin (place of manufacture) for all net sales is the U.S., the point of destination for net sales is based on the location of the customer, and property and equipment are attributable to their physical location. Intersegment sales are not material.
|
|
Years ended December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
|
(In thousands)
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Security Products
|
|
$
|
71,397
|
|
|
$
|
73,715
|
|
|
$
|
81,510
|
|
Marine Components
|
|
|
8,418
|
|
|
|
9,481
|
|
|
|
10,535
|
|
Total
|
|
$
|
79,815
|
|
|
$
|
83,196
|
|
|
$
|
92,045
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Security Products
|
|
$
|
14,361
|
|
|
$
|
14,143
|
|
|
$
|
16,142
|
|
Marine Components
|
|
|
(1,223
|
)
|
|
|
(819
|
)
|
|
|
(148
|
)
|
Corporate
|
|
|
(6,726
|
)
(a)
|
|
|
(7,906
|
)
(a)
|
|
|
(6,666
|
)
|
Total operating income
|
|
|
6,412
|
|
|
|
5,418
|
|
|
|
9,328
|
|
Other non-operating income, net
|
|
|
358
|
|
|
|
-
|
|
|
|
40
|
|
Interest expense
|
|
|
(722
|
)
|
|
|
(479
|
)
|
|
|
(127
|
)
|
Income from continuing operations before income
taxes
|
|
$
|
6,048
|
|
|
$
|
4,939
|
|
|
$
|
9,241
|
|
(a)
|
Corporate operating expenses include write-downs and loss on the disposal of certain assets held for sale of $1.1 in 2011 and $1.2 million in 2012. See Note 7.
|
|
|
Years ended December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
|
(In thousands)
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Security Products
|
|
$
|
2,976
|
|
|
$
|
2,618
|
|
|
$
|
2,460
|
|
Furniture Components*
|
|
|
2,853
|
|
|
|
2,404
|
|
|
|
-
|
|
Marine Components
|
|
|
907
|
|
|
|
687
|
|
|
|
741
|
|
Corporate
|
|
|
42
|
|
|
|
63
|
|
|
|
69
|
|
Total
|
|
$
|
6,778
|
|
|
$
|
5,772
|
|
|
$
|
3,270
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Security Products
|
|
$
|
1,714
|
|
|
$
|
2,029
|
|
|
$
|
3,171
|
|
Furniture Components*
|
|
|
1,333
|
|
|
|
1,721
|
|
|
|
-
|
|
Marine Components
|
|
|
112
|
|
|
|
713
|
|
|
|
310
|
|
Corporate
|
|
|
36
|
|
|
|
14
|
|
|
|
20
|
|
Total
|
|
$
|
3,195
|
|
|
$
|
4,477
|
|
|
$
|
3,501
|
|
F-14
|
|
Years ended December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
|
(In thousands)
|
|
Net sales point of destination:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
75,594
|
|
|
$
|
78,268
|
|
|
$
|
87,307
|
|
Canada
|
|
|
1,982
|
|
|
|
2,194
|
|
|
|
2,195
|
|
Mexico
|
|
|
1,060
|
|
|
|
1,249
|
|
|
|
1,129
|
|
Other
|
|
|
1,179
|
|
|
|
1,485
|
|
|
|
1,414
|
|
Total
|
|
$
|
79,815
|
|
|
$
|
83,196
|
|
|
$
|
92,045
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Security Products
|
|
$
|
69,185
|
|
|
$
|
69,143
|
|
|
$
|
69,918
|
|
Furniture Components*
|
|
|
50,174
|
|
|
|
-
|
|
|
|
-
|
|
Marine Components
|
|
|
10,531
|
|
|
|
9,689
|
|
|
|
9,782
|
|
Corporate and eliminations
|
|
|
11,636
|
|
|
|
71,351
|
|
|
|
41,978
|
|
Total
|
|
$
|
141,526
|
|
|
$
|
150,183
|
|
|
$
|
121,678
|
|
Net property and equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
33,704
|
|
|
$
|
33,727
|
|
|
$
|
33,752
|
|
Canada*
|
|
|
9,681
|
|
|
|
-
|
|
|
|
-
|
|
Taiwan*
|
|
|
7,742
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
51,127
|
|
|
$
|
33,727
|
|
|
$
|
33,752
|
|
*
|
Denotes disposed operations. See Note 2.
|
Note 4
–
Accounts receivable, net:
|
|
December 31,
2012
|
|
|
December 31,
2013
|
|
|
|
(In thousands)
|
|
Account receivable, net:
|
|
|
|
|
|
|
|
|
Security Products
|
|
$
|
7,952
|
|
|
$
|
7,813
|
|
Marine Components
|
|
|
744
|
|
|
|
849
|
|
Allowance for doubtful accounts
|
|
|
(216
|
)
|
|
|
(128
|
)
|
Total accounts receivable, net
|
|
$
|
8,480
|
|
|
$
|
8,534
|
|
F-15
Note 5
–
Inventories:
|
|
December 31,
|
|
|
|
2012
|
|
|
2013
|
|
|
|
(In thousands)
|
|
Raw materials:
|
|
|
|
|
|
|
|
|
Security Products
|
|
$
|
2,310
|
|
|
$
|
2,565
|
|
Marine Components
|
|
|
943
|
|
|
|
1,000
|
|
Total raw materials
|
|
|
3,253
|
|
|
|
3,565
|
|
Work-in-process:
|
|
|
|
|
|
|
|
|
Security Products
|
|
|
5,458
|
|
|
|
5,992
|
|
Marine Components
|
|
|
444
|
|
|
|
704
|
|
Total work-in-process
|
|
|
5,902
|
|
|
|
6,696
|
|
Finished goods:
|
|
|
|
|
|
|
|
|
Security Products
|
|
|
1,578
|
|
|
|
2,349
|
|
Marine Components
|
|
|
490
|
|
|
|
625
|
|
Total finished goods
|
|
|
2,068
|
|
|
|
2,974
|
|
Total inventories, net
|
|
$
|
11,223
|
|
|
$
|
13,235
|
|
Note 6
–
Goodwill:
We have assigned goodwill to each of our
reporting units
(as that term is defined in ASC Topic 350-20-20,
Goodwill
) which correspond to our operating segments. We test for goodwill impairment at the reporting unit level. In accordance with the requirements of ASC Topic 350-20-20, we review goodwill for each of our reporting units for impairment during the third quarter of each year or when circumstances arise that indicate an impairment might be present. Prior to 2013, we used a quantitative assessment in determining the estimated fair value of the reporting units, using appropriate valuation techniques such as discounted cash flows. Such discounted cash flows are a Level 3 input as defined by ASC 820-10-35. If the carrying amount of goodwill exceeds its implied fair value, an impairment charge is recorded. In 2013 we adopted the guidance in ASU No. 2011-08 for testing goodwill for impairment by assessing qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Based on our qualitative assessment, a quantitative assessment was not required for 2013.
In 2011, 2012 and 2013, goodwill for all applicable reporting units was tested for impairment only in the third quarter of each year in connection with our annual testing date
. No impairment was indicated as part of our annual reviews of goodwill. In 2008, we recorded a $9.9 million goodwill impairment in our Marine Components segment. Our gross goodwill at December 31, 2013 is $33.6 million.
F-16
Changes in the carrying amount of goodwill related to our operations during the past three years are presented in the table below. Goodwill acquired in 2011 relates to the acquisition of an ergonomic components product business included in our Furniture Components operating segment. In December 2012, we sold our Furniture Components segment. See Note 2. The remaining net goodwill balance was generated from acquisitions relating to Security Product
s prior to 2001.
|
|
Security
Products
|
|
|
Furniture
Components
|
|
|
Total
|
|
|
|
(In millions)
|
|
Balance at December 31, 2010
|
|
$
|
23.7
|
|
|
$
|
7.7
|
|
|
$
|
31.4
|
|
Goodwill acquired during the year
|
|
|
-
|
|
|
|
3.1
|
|
|
|
3.1
|
|
Changes in currency exchange rates
|
|
|
-
|
|
|
|
(0.3
|
)
|
|
|
(0.3
|
)
|
Balance at December 31, 2011
|
|
|
23.7
|
|
|
|
10.5
|
|
|
|
34.2
|
|
Sale of disposed operations
|
|
|
-
|
|
|
|
(10.8
|
)
|
|
|
(10.8
|
)
|
Changes in currency exchange rates
|
|
|
-
|
|
|
|
0.3
|
|
|
|
0.3
|
|
Balance at December 31, 2012 and 2013
|
|
$
|
23.7
|
|
|
$
|
-
|
|
|
$
|
23.7
|
|
Note 7
–
Other noncurrent:
|
|
December 31,
|
|
|
|
2012
|
|
|
2013
|
|
|
|
(In thousands)
|
|
Assets held for sale
|
|
$
|
1,965
|
|
|
|
532
|
|
Other
|
|
|
154
|
|
|
|
41
|
|
Total other noncurrent assets
|
|
$
|
2,119
|
|
|
$
|
573
|
|
Prior to 2012, our assets held for sale consisted of two facilities (land, building, and building improvements) and certain unimproved land, all of which were formerly used in our operations.
These assets were classified as “assets held for sale” when they ceased to be used in our operations and met all of the applicable criteria under GAAP. During 2012 we obtained updated independent appraisals of the significant assets. Based on these appraisals, we recognized a write-down in the third quarter of $405,000 to reduce the carrying value of the assets to their estimated fair value less cost to sell. Subsequently we sold one of the facilities in December 2012 for net proceeds of $3.6 million, which net proceeds were less than the carrying amount of the assets and we therefore recognized a loss on the sale of the facility of approximately $757,000 in 2012. At December 31, 2012 our assets held for sale consisted of the remaining facility and the unimproved land. In 2013 we sold the remaining facility for net proceeds of $1.6 million, which approximated the carrying value of the assets as of the date of the sale. At December 31, 2013 our assets held for sale consisted only of the unimproved land.
We also recognized an asset held for sale write-down of $1.1 million in 2011 related to these properties, associated with obtaining updated appraisals on the properties. These appraisals represent a Level 2 input as defined by ASC 820-10-35.
The write-downs on assets held for sale in 2011 and 2012 and loss on the sale of the facility are included in corporate operating expense.
See Note 3.
F-17
Note 8
–
Accounts payable and accrued liabilities:
|
|
December 31,
|
|
|
|
2012
|
|
|
2013
|
|
|
|
(In thousands)
|
|
Accounts payable
|
|
$
|
2,797
|
|
|
$
|
1,452
|
|
Accrued liabilities:
|
|
|
|
|
|
|
|
|
Employee benefits
|
|
|
6,541
|
|
|
|
6,788
|
|
Customer tooling
|
|
|
282
|
|
|
|
388
|
|
Taxes other than on income
|
|
|
439
|
|
|
|
378
|
|
Insurance
|
|
|
305
|
|
|
|
243
|
|
Professional
|
|
|
189
|
|
|
|
86
|
|
Other
|
|
|
508
|
|
|
|
370
|
|
Total
|
|
$
|
11,061
|
|
|
$
|
9,705
|
|
Note 9
–
Long-term Debt:
|
|
December 31,
|
|
|
|
2012
|
|
|
2013
|
|
|
|
(In thousands)
|
|
Note payable to Timet Finance Management Company
|
|
$
|
18,480
|
|
|
$
|
-
|
|
Less current maturities
|
|
|
1,000
|
|
|
|
-
|
|
Total long-term debt
|
|
$
|
17,480
|
|
|
$
|
-
|
|
Note payable to Timet Finance Management Company.
Prior to 2011, we purchased and/or cancelled certain shares of our Class A common stock from Timet Finance Management Company (“TFMC”) a former affiliate. We paid for the shares acquired in the form of a promissory note which, as amended, bore interest at LIBOR plus 1% and provided for quarterly principal repayments of $250,000, with the balance due at maturity in September 2014. The promissory note was prepayable, in whole or in part, at any time at our option without penalty. In July of 2013, we prepaid the remaining outstanding principal amount of the note, plus accrued interest, without penalty. We had net repayments on the note payable of $20 million in 2011 (including $15.0 million of repayments using cash we received upon collection of our promissory note receivable discussed in Note 12), $3.8 million in 2012 and $18.5 million in 2013 (including the amount paid upon final payment). The average interest rate on the promissory note payable was 1.3% in 2011, 1.5% in 2012 and 1.3% for the year-to-date period ended July 18, 2013 (the pay-off date). We recognized interest expense of approximately $464,000 in 2011, $303,000 in 2012, and $127,000 in 2013 on this promissory note.
F-18
Note 10
–
Income taxes:
The provision for income taxes attributable to continuing operations, the difference between such provision for income taxes and the amount that would be expected using the U.S. federal statutory income tax rate of 35%, and the comprehensive provision for income taxes are presented below
. All of our pre-tax income attributable to continuing operations relates to operations in the United States.
|
|
Years ended December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
|
(In thousands)
|
|
Provision for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Currently payable
|
|
$
|
2,677
|
|
|
$
|
1,633
|
|
|
$
|
2,310
|
|
Deferred income tax expense (benefit)
|
|
|
(133
|
)
|
|
|
(218
|
)
|
|
|
916
|
|
Total
|
|
$
|
2,544
|
|
|
$
|
1,415
|
|
|
$
|
3,226
|
|
Expected tax expense, at the U.S. federal statutory income tax rate of 35%
|
|
$
|
2,117
|
|
|
$
|
1,729
|
|
|
$
|
3,234
|
|
State income taxes and other, net
|
|
|
337
|
|
|
|
173
|
|
|
|
294
|
|
Tax credits
|
|
|
(251
|
)
|
|
|
(170
|
)
|
|
|
(200
|
)
|
Valuation allowance
|
|
|
341
|
|
|
|
(317
|
)
|
|
|
(102
|
)
|
Total
|
|
$
|
2,544
|
|
|
$
|
1,415
|
|
|
$
|
3,226
|
|
Comprehensive provision for income tax allocable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
2,544
|
|
|
$
|
1,415
|
|
|
$
|
3,226
|
|
Discontinued operations
|
|
|
4,876
|
|
|
|
5,397
|
|
|
|
-
|
|
Total
|
|
$
|
7,420
|
|
|
$
|
6,812
|
|
|
$
|
3,226
|
|
The components of net deferred tax assets (liabilities) are summarized below.
|
|
December 31,
|
|
|
|
2012
|
|
|
2013
|
|
|
|
(In thousands)
|
|
Tax effect of temporary differences related to:
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
953
|
|
|
$
|
932
|
|
Property and equipment
|
|
|
(3,775
|
)
|
|
|
(4,348
|
)
|
Accrued liabilities and other deductible differences
|
|
|
304
|
|
|
|
63
|
|
Accrued employee benefits
|
|
|
1,484
|
|
|
|
1,513
|
|
Tax loss and credit carryforwards
|
|
|
130
|
|
|
|
28
|
|
Goodwill
|
|
|
(2,374
|
)
|
|
|
(2,559
|
)
|
Other taxable differences
|
|
|
(87
|
)
|
|
|
(12
|
)
|
Valuation allowance
|
|
|
(126
|
)
|
|
|
(24
|
)
|
Total
|
|
$
|
(3,491
|
)
|
|
$
|
(4,407
|
)
|
Net current deferred tax assets
|
|
|
2,691
|
|
|
|
2,493
|
|
Net noncurrent deferred tax liabilities
|
|
|
(6,182
|
)
|
|
|
(6,900
|
)
|
Total
|
|
$
|
(3,491
|
)
|
|
$
|
(4,407
|
)
|
Our tax loss and credit carryforwards at December 31, 2012 and 2013
relate to carryforwards in various U.S. state jurisdictions. At December 31, 2013, we had approximately $294,000 of state net operating loss carryforwards which will expire in 2023. At December 31, 2012 and 2013, we concluded that the benefit associated with a portion of our U.S. state net operating losses do not meet the more-likely-than-not recognition criteria, accordingly we have recognized a deferred income tax asset valuation allowance of $126,000 and $24,000 at
F-19
December 31, 2012 and 2013, respectively, with respect to such carryforwards. Our provision for income taxes attributable to continuing operations includes an expense of $341,000 in 2011 and a benefit of $317,000 and $102,000 in 2012 and 2013, respectively, related to changes in such valuation allowance.
We file income tax returns in various U.S. federal, state and local jurisdictions.
Prior to 2012, we also filed income tax returns in various foreign jurisdictions, principally in Canada and Taiwan. Our domestic income tax returns prior to 2010 are generally considered closed to examination by applicable tax authorities.
Note 11
–
Stockholders’ equity:
|
|
Shares of common stock
|
|
|
|
Class A
|
|
|
Class B
|
|
|
|
Issued and
outstanding
|
|
|
Issued and
outstanding
|
|
Balance at December 31, 2010
|
|
|
2,375,307
|
|
|
|
10,000,000
|
|
Issued
|
|
|
10,800
|
|
|
|
-
|
|
Balance at December 31, 2011
|
|
|
2,386,107
|
|
|
|
10,000,000
|
|
Issued
|
|
|
6,000
|
|
|
|
-
|
|
Balance at December 31, 2012
|
|
|
2,392,107
|
|
|
|
10,000,000
|
|
Issued
|
|
|
5,000
|
|
|
|
-
|
|
Balance at December 31, 2013
|
|
|
2,397,107
|
|
|
|
10,000,000
|
|
Class A and Class B common stock.
The shares of Class A common stock and Class B common stock are identical in all
respects, except for certain voting rights and certain conversion rights in respect of the shares of the Class B common stock. Holders of Class A common stock are entitled to one vote per share. NL, which holds all of the outstanding shares of Class B common stock, is entitled to one vote per share in all matters except for election of directors, for which NL is entitled to ten votes per share. Holders of all classes of common stock entitled to vote will vote together as a single class on all matters presented to the stockholders for their vote or approval, except as otherwise required by applicable law. Each share of Class A common stock and Class B common stock have an equal and ratable right to receive dividends to be paid from our assets when, and if declared by the board of directors. In the event of the dissolution, liquidation or winding up of our operations, the holders of Class A common stock and Class B common stock will be entitled to share equally and ratably in the assets available for distribution after payments are made to our creditors and to the holders of any of our preferred stock that may be outstanding at the time. Shares of the Class A common stock have no conversion rights. Under certain conditions, shares of Class B common stock will convert, on a share-for-share basis, into shares of Class A common stock.
Share repurchases and cancellations.
Prior to 2011, our board of directors authorized various repurchases of shares of our Class A common stock in open market transactions, including block purchases, or in privately-negotiated transactions at unspecified prices and over an unspecified period of time. We may repurchase our common stock from time to time as market conditions permit. The stock repurchase program does not include specific price targets or timetables and may be suspended at any time. Depending on market conditions, we may terminate the program prior to its completion. We will generally use cash on hand to acquire the shares. Repurchased shares will be added to our treasury and cancelled. We made no treasury purchases during 2011, 2012 or 2013 and at December 31, 2013, approximately 678,000 shares were available for purchase under these authorizations.
Incentive compensation plan.
We have a share based incentive compensation plan pursuant to which an aggregate of up to 200,000 shares of our common stock can be awarded to members of our board of directors. At December 31, 2013, 195,000 shares were available for award under this plan.
Dividends.
In May 2013, ou
r board of directors reduced our regular quarterly dividend from $0.125 per share to $0.05 per share, effective with our second quarter 2013 dividend. Declaration and payment of future dividends and the amount thereof, if any, is discretionary and 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.
F-20
Note 12
–
Related party transactions:
We may be deemed to be controlled by
Ms. Lisa Simmons, Ms. Connelly, and Ms Annette Simmons. See Note 1. Corporations that may be deemed to be controlled by or affiliated with these individuals sometimes engage in (a) intercorporate transactions such as guarantees, management and expense sharing arrangements, shared fee arrangements, joint ventures, partnerships, loans, options, advances of funds on open account, and sales, leases and exchanges of assets, including securities issued by both related and unrelated parties and (b) common investment and acquisition strategies, business combinations, reorganizations, recapitalizations, securities repurchases, and purchases and sales (and other acquisitions and dispositions) of subsidiaries, divisions or other business units, which transactions have involved both related and unrelated parties and have included transactions that resulted in the acquisition by one related party of a publicly-held minority equity interest in another related party. We continuously consider, review and evaluate, and understand that Contran and related entities consider, review and evaluate such transactions. Depending upon the business, tax and other objectives then relevant, it is possible that we might be a party to one or more such transactions in the future.
From time to time, we will 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. While certain of these loans may be of a lesser credit quality than cash equivalent instruments otherwise available to us, we believe we have evaluated the credit risks in the terms of the applicable loans. In this regard, in February 2010 we entered into an unsecured revolving demand promissory note with NL whereby we agreed to loan NL up to $8.0 million. In December 2012, this promissory note was amended whereby we agreed to loan NL up to $40 million. As amended, our loans to NL will bear interest at the prime rate less .75%, with all principal due on demand on or after March 31, 2015 (and in any event no later than December 31, 2015), with interest payable quarterly. The principal amount we lend to NL at any time is at our discretion. We made no loans to NL during 2011, 2012 or 2013.
Under the terms of an Intercorporate Service Agreement (“ISA”) with Contran, employees of Contran perform certain management, tax planning, financial, legal and administrative services for us on a fee basis
. Such fees are based upon estimates of time devoted to our affairs by individual Contran employees and the compensation of such persons. Because of the large number of companies affiliated with Contran, we believe we benefit from cost savings and economies of scale gained by not having certain management, financial and administrative staffs duplicated at each entity, thus allowing certain individuals to provide services to multiple companies but only be compensated by one entity. Fees pursuant to these agreements aggregated $3.4 million in 2011, $3.7 million in 2012 and $3.9 million in 2013. This agreement is renewed annually, and we expect to pay $3.0 million under the ISA during 2014.
Tall Pines Insurance Company (“Tall Pines”) and EWI RE, Inc. (“EWI”) provide for or broker certain insurance policies for Contran and certain of its subsidiaries and affiliates, including us
. Tall Pines and EWI are subsidiaries of Valhi. Consistent with insurance industry practices, Tall Pines and EWI receive commissions from the insurance and reinsurance underwriters and/or assess fees for the policies that they provide or broker. The aggregate premiums we paid to Tall Pines and EWI were approximately $1.3 million in 2011, $1.2 million in 2012 and $1.0 million in 2013. These amounts principally included payments for insurance, but also included commissions paid to Tall Pines and EWI. Tall Pines purchases reinsurance from third-party insurance carriers with an A.M. Best Company rating of generally at least A-(Excellent) for substantially all of the risks it underwrites. We expect that these relationships with Tall Pines and EWI will continue in 2014.
Contran and certain of its subsidiaries and affiliates, including us, purchase certain of their insurance policies as a group, with the costs of the jointly-owned policies being apportioned among the participating companies.
With respect to certain of these policies, it is possible that unusually large losses incurred by one or more insureds during a given policy period could leave the other participating companies without adequate coverage under that policy for the balance of the policy period. As a result, Contran and certain of its subsidiaries and affiliates, including us, have entered into a loss sharing agreement under which any uninsured loss is shared by those entities who have submitted claims under the relevant policy. We believe the benefits in the form of reduced
F-21
premiums and broader coverage associated with the group coverage for such policies justifies the risk associated with the potential for any uninsured loss.
Note 13
–
Commitments and contingencies:
Legal proceedings
. We are involved, from time to time, in various contractual, product liability, patent (or intellectual property), employment and other claims and disputes incidental to our business. We currently believe the disposition of all claims and disputes, individually or in the aggregate, should not have a material long-term adverse effect on our consolidated financial condition, results of operations or liquidity.
Environmental matters and litigation
. Our operations are governed by various federal
, state and local environmental laws and regulations. Our policy is to comply with environmental laws and regulations at all of our plants and to continually strive to improve environmental performance in association with applicable industry initiatives. We believe that our operations are in substantial compliance with applicable requirements of environmental laws. From time to time, we may be subject to environmental regulatory enforcement under various statutes, resolution of which typically involves the establishment of compliance programs.
Income taxes.
From time to time, we undergo examinations of our income tax returns, and tax authorities have or may propose tax deficiencies. We believe that we have adequately provided accruals for additional in
come taxes and related interest expense which may ultimately result from such examinations and we believe that the ultimate disposition of all such examinations should not have a material adverse effect on our consolidated financial position, results of operations or liquidity.
We have agreed to a policy with Contran and NL providing for the allocation of tax liabilities and tax payments as described in Note 1. Under applicable law, we, as well as every other member of the Contran Tax Group, are each jointly and severally liable for the aggregate federal income tax liability of Contran and the other companies included in the Contran Tax Group for all periods in which we are included in the Contran Tax Group. NL has agreed, however, to indemnify us for any
liability for income taxes of the Contran Tax Group in excess of our tax liability in accordance with the tax allocation policy.
Concentration of credit risk
.
Our products are sold primarily in North America to original equipment manufacturers. The ten largest customers related to our continuing operations accounted for approximately 39% of sales in 2011, 38% in 2012, and 42% in 2013. San Mateo Postal Data, a customer of the Security Products segment, accounted for 13% of total sales in 2013. Harley Davidson, also a customer of the Security Products segment, accounted for approximately 13%, in 2011 and 12% in each of 2012 and 2013.
Rent expense related to continuing operations was not significant in 2011, 2012 or 2013 and at December 31, 2013
, future minimum rentals under noncancellable operating leases are also not significant.
Note 14
–
Financial instruments:
The following table presents the financial instruments that are not carried at fair value but which require fair value disclosure:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2013
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
amount
|
|
|
value
|
|
|
amount
|
|
|
value
|
|
Cash and cash equivalents
|
|
$
|
63,777
|
|
|
$
|
63,777
|
|
|
$
|
38,753
|
|
|
$
|
38,753
|
|
Accounts receivable, net
|
|
|
8,480
|
|
|
|
8,480
|
|
|
|
8,534
|
|
|
|
8,534
|
|
Accounts payable
|
|
|
2,797
|
|
|
|
2,797
|
|
|
|
1,452
|
|
|
|
1,452
|
|
Variable rate long-term debt – (including current maturities)
|
|
|
18,480
|
|
|
|
18,480
|
|
|
|
-
|
|
|
|
-
|
|
F-22
Due to their near-term maturities, the carrying amounts of accounts receivable and accounts payable are considered equivalent to fair value.
The fair value of our variable-rate long-term debt is deemed to approximate book value. The fair value of our long-term debt is a Level 2 inputs as defined by ASC Topic 820-10-35.