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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended September 30, 2023

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________

Commission file number 1-13905

COMPX INTERNATIONAL INC.

(Exact name of Registrant as specified in its charter)

DELAWARE

    

57-0981653

(State or other jurisdiction of
incorporation or organization)

(IRS Employer
Identification No.)

5430 LBJ Freeway, Suite 1700

Dallas, Texas 75240-2620

(Address of principal executive offices)

Registrant’s telephone number, including area code (972) 448-1400

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

    

Trading Symbol(s)

    

Name of each exchange on which registered

Class A common stock

CIX

NYSE American

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.   Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

  Smaller reporting company

Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes      No  .

As of October 26, 2023, the registrant had 12,313,757 shares of Class A common stock, $.01 par value per share, outstanding.

COMPX INTERNATIONAL INC.

Index

    

Page

Part I.

FINANCIAL INFORMATION

Item 1.

Financial Statements

Condensed Consolidated Balance Sheets – December 31, 2022 and September 30, 2023 (unaudited)

- 3 -

Condensed Consolidated Statements of Income and Comprehensive Income (unaudited) – Three and nine months ended September 30, 2022 and 2023

- 4 -

Condensed Consolidated Statements of Stockholders’ Equity (unaudited) – Three and nine months ended September 30, 2022 and 2023

- 5 -

Condensed Consolidated Statements of Cash Flows (unaudited) – Nine months ended September 30, 2022 and 2023

- 6 -

Notes to Condensed Consolidated Financial Statements (unaudited)

- 7 -

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

- 11 -

Item 3.

Quantitative and Qualitative Disclosure About Market Risk

- 17 -

Item 4.

Controls and Procedures

- 17 -

Part II.

OTHER INFORMATION

Item 1A.

Risk Factors

- 18 -

Item 6.

Exhibits

- 18 -

Items 2, 3, 4 and 5 of Part II are omitted because there is no information to report.

- 2 -

COMPX INTERNATIONAL INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

December 31, 

September 30, 

ASSETS

2022

2023

(unaudited)

Current assets:

 

  

  

Cash and cash equivalents

$

26,748

$

17,595

Marketable securities

33,147

46,774

Accounts receivable, net

 

17,840

 

19,735

Inventories, net

 

31,290

 

34,282

Prepaid expenses and other

 

2,136

 

2,152

Total current assets

 

111,161

 

120,538

Other assets:

 

  

 

  

Note receivable from affiliate

 

13,200

 

12,000

Goodwill

 

23,742

 

23,742

Other noncurrent assets

 

590

 

738

Total other assets

 

37,532

 

36,480

Property and equipment:

 

  

 

  

Land

 

5,390

 

5,390

Buildings

 

23,181

 

23,181

Equipment

 

74,113

 

74,486

Construction in progress

 

722

 

512

 

103,406

 

103,569

Less accumulated depreciation

 

74,712

 

77,347

Net property and equipment

 

28,694

 

26,222

Total assets

$

177,387

$

183,240

LIABILITIES AND STOCKHOLDERS' EQUITY

    

Current liabilities:

 

  

Accounts payable and accrued liabilities

$

15,618

$

15,047

Income taxes payable to affiliate

 

1,035

 

1,351

Total current liabilities

 

16,653

 

16,398

Noncurrent liabilities:

 

 

Deferred income taxes

2,230

1,651

Other

68

43

Total noncurrent liabilities

2,298

1,694

Stockholders' equity:

 

  

 

  

Preferred stock

 

 

Class A common stock

 

123

 

123

Additional paid-in capital

 

53,155

 

53,275

Retained earnings

 

105,175

 

111,839

Accumulated other comprehensive loss -
  unrealized loss on marketable securities

(17)

(89)

Total stockholders' equity

 

158,436

 

165,148

Total liabilities and stockholders’ equity

$

177,387

$

183,240

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

Nine months ended

September 30, 

September 30, 

    

2022

    

2023

    

2022

    

2023

(unaudited)

Net sales

$

42,864

$

40,355

$

126,589

$

118,122

Cost of sales

 

30,928

 

27,736

 

88,944

 

82,526

Gross margin

 

11,936

 

12,619

 

37,645

 

35,596

Selling, general and administrative expense

 

6,016

 

6,074

 

17,674

 

17,644

Operating income

 

5,920

 

6,545

 

19,971

 

17,952

Interest income

 

558

 

1,064

 

1,109

 

3,003

Income before income taxes

 

6,478

 

7,609

 

21,080

 

20,955

Provision for income taxes

 

1,528

 

1,852

 

4,970

 

5,058

Net income

$

4,950

$

5,757

$

16,110

$

15,897

Other comprehensive gain (loss), marketable securities adjustment:

Unrealized gain (loss) arising during year, net

30

(72)

Comprehensive income

$

4,950

$

5,787

$

16,110

$

15,825

Basic and diluted net income per common share

$

.40

$

.47

$

1.30

$

1.29

Basic and diluted weighted average shares outstanding

 

12,307

 

12,314

 

12,352

 

12,310

See accompanying Notes to Condensed Consolidated Financial Statements.

- 4 -

COMPX INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

Three months ended September 30, 2022 and 2023 (unaudited)

Accumulated

Class A

Additional

other

 

Total

common

paid-in

Retained

comprehensive

Treasury

 

stockholders'

    

stock

    

capital

    

earnings

    

loss

stock

 

equity

Balance at June 30, 2022

$

123

$

53,155

$

123,155

$

$

$

176,433

Net income

 

 

 

4,950

 

 

 

4,950

Cash dividends ($2.00 per share)

 

 

 

(24,614)

 

 

 

(24,614)

Balance at September 30, 2022

$

123

$

53,155

$

103,491

$

$

$

156,769

Balance at June 30, 2023

$

123

$

53,275

$

109,160

$

(119)

$

$

162,439

Net income

 

 

 

5,757

 

 

 

5,757

Cash dividends ($.25 per share)

 

 

 

(3,078)

 

 

 

(3,078)

Other comprehensive income

30

30

Balance at September 30, 2023

$

123

$

53,275

$

111,839

$

(89)

$

$

165,148

Nine months ended September 30, 2022 and 2023 (unaudited)

Accumulated

Class A

Additional

other

 

Total

common

paid-in

Retained

comprehensive

Treasury

 

stockholders'

    

stock

    

capital

    

earnings

    

loss

stock

 

equity

Balance at December 31, 2021

$

124

$

54,780

$

118,184

$

$

$

173,088

Net income

 

 

 

16,110

 

 

 

16,110

Issuance of common stock

118

118

Treasury stock:

Acquired

(1,744)

(1,744)

Retired

(1)

(1,743)

1,744

Cash dividends ($2.50 per share)

 

 

 

(30,803)

 

 

 

(30,803)

Balance at September 30, 2022

$

123

$

53,155

$

103,491

$

$

$

156,769

Balance at December 31, 2022

$

123

$

53,155

$

105,175

$

(17)

$

$

158,436

Net income

 

 

 

15,897

 

 

 

15,897

Issuance of common stock

120

120

Cash dividends ($.75 per share)

 

 

 

(9,233)

 

 

 

(9,233)

Other comprehensive loss

 

 

 

 

(72)

 

 

(72)

Balance at September 30, 2023

$

123

$

53,275

$

111,839

$

(89)

$

$

165,148

See accompanying Notes to Condensed Consolidated Financial Statements.

- 5 -

COMPX INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Nine months ended

September 30, 

    

2022

    

2023

(unaudited)

Cash flows from operating activities:

 

  

 

  

Net income

$

16,110

$

15,897

Depreciation and amortization

 

2,962

 

2,996

Deferred income taxes

 

(742)

 

(556)

Noncash interest income

(1,397)

Other, net

 

287

 

332

Change in assets and liabilities:

 

  

 

Accounts receivable, net

 

(3,634)

 

(1,900)

Inventories, net

 

(7,846)

 

(3,199)

Accounts payable and accrued liabilities

 

1,454

 

(526)

Accounts with affiliates

 

(347)

 

316

Prepaids and other, net

 

(122)

 

(194)

Net cash provided by operating activities

 

8,122

 

11,769

Cash flows from investing activities:

 

  

 

  

Capital expenditures

 

(3,008)

 

(564)

Marketable securities:

Purchases

 

 

(36,325)

Proceeds from maturities

131

24,000

Note receivable from affiliate:

 

  

 

  

Collections

 

21,100

 

21,900

Advances

 

(17,100)

 

(20,700)

Net cash provided by (used in) investing activities

 

1,123

 

(11,689)

Cash flows from financing activities:

Dividends paid

 

(30,803)

 

(9,233)

Treasury stock acquired

(1,744)

Net cash used in financing activities

(32,547)

(9,233)

Cash and cash equivalents - net change from:

Operating, investing and financing activities

(23,302)

(9,153)

Balance at beginning of period

 

76,579

 

26,748

Balance at end of period

$

53,277

$

17,595

Supplemental disclosures -

Cash paid for income taxes

$

6,080

$

5,315

See accompanying Notes to Condensed Consolidated Financial Statements.

- 6 -

COMPX INTERNATIONAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(unaudited)

Note 1 – Organization and basis of presentation:

Organization. We (NYSE American: CIX) were approximately 87% owned by NL Industries, Inc. (NYSE: NL) at September 30, 2023. At September 30, 2023, Valhi, Inc. (NYSE: VHI) owned approximately 83% of NL’s outstanding common stock and a wholly-owned subsidiary of Contran Corporation owned approximately 91% of Valhi’s outstanding common stock. A majority of Contran’s outstanding voting stock is held directly by Lisa K. Simmons and various family trusts established for the benefit of Ms. Simmons, Thomas C. Connelly (the husband of Ms. Simmons’ late sister) and their children and for which Ms. Simmons or Mr. Connelly, as applicable, serve as trustee (collectively, the “Other Trusts”). With respect to the Other Trusts for which Mr. Connelly serves as trustee, he is required to vote the shares of Contran voting stock held in such trusts in the same manner as Ms. Simmons. Such voting rights of Ms. Simmons last through April 22, 2030 and are personal to Ms. Simmons. The remainder of Contran’s outstanding voting stock is held by another trust (the “Family Trust”), which was established for the benefit of Ms. Simmons and her late sister and their children and for which a third-party financial institution serves as trustee. Consequently, at September 30, 2023 Ms. Simmons and the Family Trust may be deemed to control Contran, and therefore may be deemed to indirectly control the wholly-owned subsidiary of Contran, Valhi, NL and us.

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, 2022 that we filed with the Securities and Exchange Commission (“SEC”) on March 1, 2023 (the “2022 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, 2022 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, 2022) 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 periods ended September 30, 2023 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 2022 Consolidated Financial Statements contained in our 2022 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 September 30, 2022, December 31, 2022 and September 30, 2023. The actual dates of our annual and quarterly periods are October 2, 2022, January 1, 2023 and October 1, 2023, 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

Nine months ended

September 30, 

September 30, 

    

2022

    

2023

    

2022

    

2023

(In thousands)

Net sales:

 

  

 

  

  

 

  

Security Products

$

28,493

$

31,376

$

86,911

$

84,390

Marine Components

 

14,371

 

8,979

 

39,678

 

33,732

Total net sales

$

42,864

$

40,355

$

126,589

$

118,122

Operating income:

 

  

 

  

 

  

 

  

Security Products

$

4,904

$

6,496

$

17,645

$

16,009

Marine Components

 

2,716

 

1,693

 

7,449

 

6,953

Corporate operating expenses

 

(1,700)

 

(1,644)

 

(5,123)

 

(5,010)

Total operating income

 

5,920

 

6,545

 

19,971

 

17,952

Interest income

 

558

 

1,064

 

1,109

 

3,003

Income before income taxes

$

6,478

$

7,609

$

21,080

$

20,955

Intersegment sales are not material.

n

Note 3 – Marketable securities:

    

    

Amortized

    

Unrealized

    

Market value

    

cost basis

    

loss, net

(In thousands)

December 31, 2022:

 

  

 

  

 

  

Current assets

$

33,147

$

33,164

$

(17)

 

 

 

September 30, 2023:

Current assets

$

46,774

$

46,886

$

(112)

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, 

September 30, 

    

2022

    

2023

(In thousands)

Accounts receivable, net:

 

  

 

  

Security Products

$

13,767

$

16,531

Marine Components

 

4,143

 

3,274

Allowance for doubtful accounts

 

(70)

 

(70)

Total accounts receivable, net

$

17,840

$

19,735

- 8 -

Note 5 – Inventories, net:

December 31, 

September 30, 

    

2022

    

2023

(In thousands)

Raw materials:

 

  

 

  

Security Products

$

4,172

$

3,464

Marine Components

 

2,073

 

2,109

Total raw materials

 

6,245

 

5,573

Work-in-process:

 

  

 

  

Security Products

 

14,193

 

17,476

Marine Components

 

5,790

 

5,562

Total work-in-process

 

19,983

 

23,038

Finished goods:

 

  

 

  

Security Products

 

3,163

 

3,233

Marine Components

 

1,899

 

2,438

Total finished goods

 

5,062

 

5,671

Total inventories, net

$

31,290

$

34,282

Note 6 – Accounts payable and accrued liabilities:

December 31, 

September 30, 

    

2022

    

2023

(In thousands)

Accounts payable:

 

  

 

  

Security Products

$

2,663

$

3,156

Marine Components

 

874

 

835

Accrued liabilities:

 

  

 

  

Employee benefits

 

10,489

 

8,703

Taxes other than on income

 

279

 

489

Insurance

 

255

 

264

Deferred revenue

243

574

Customer tooling

 

135

 

199

Advances from customers

298

440

Other

 

382

 

387

Total accounts payable and accrued liabilities

$

15,618

$

15,047

Note 7 – Provision for income taxes:

Three months ended

Nine months ended

September 30, 

September 30, 

    

2022

    

2023

    

2022

    

2023

(In thousands)

Expected tax expense, at the U.S. federal statutory
  income tax rate of 21%

$

1,361

$

1,598

$

4,427

$

4,401

State income taxes

 

194

 

230

 

633

 

631

FDII benefit

 

(34)

 

(17)

 

(106)

 

(57)

Other, net

 

7

 

41

 

16

 

83

Total provision for income taxes

$

1,528

$

1,852

$

4,970

$

5,058

Comprehensive provision for income taxes allocable to:

Net income

$

1,528

$

1,852

$

4,970

$

5,058

Other comprehensive income (loss) - marketable securities

8

(23)

Total

$

1,528

$

1,860

$

4,970

$

5,035

- 9 -

Note 8 – Stockholders’ equity:

Our board of directors has previously authorized the repurchase 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 use cash on hand to acquire the shares. Repurchased shares are added to our treasury and cancelled.

We made no treasury purchases during the first nine months of 2023. During the second quarter of 2022, we acquired 78,900 shares of our Class A common stock for an aggregate amount of approximately $1.7 million under the prior repurchase authorizations.  Of these shares, 70,000 shares were purchased in a market transaction, and 8,900 shares were purchased from two of our affiliates in two separate private transactions that were also approved in advance by our independent directors. At September 30, 2023, 523,647 shares were available for purchase under prior repurchase authorizations.

Note 9 – 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, 2022

September 30, 2023

Carrying

Fair

Carrying

Fair

    

amount

    

value

    

amount

    

value

(In thousands)

Cash and cash equivalents

$

26,748

$

26,748

$

17,595

$

17,595

Due to their near-term maturities, the carrying amounts of accounts receivable and accounts payable are considered equivalent to fair value.

Note 10 – 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 $25 million. Our loan to Valhi, as amended, bears interest at prime plus 1.00%, payable quarterly, with all principal due on demand, but in any event no earlier than December 31, 2024. Loans made to Valhi at any time under the agreement are at our discretion. At September 30, 2023, the outstanding principal balance receivable from Valhi under the promissory note was $12.0 million. Interest income (including unused commitment fees) on our loan to Valhi was $.7 million and $.9 million for the nine months ended September 30, 2022 and 2023, respectively.

- 10 -

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 and safety or other regulations,
General global economic and political conditions that disrupt or introduce instability into our supply chain, impact our customers’ level of demand or our customers’ perception regarding demand or impair our ability to operate our facilities (including changes in the level of gross domestic product in various regions of the world, natural disasters, terrorist acts, global conflicts and public health crises such as COVID-19),

- 11 -

Operating interruptions (including, but not limited to, labor disputes, hazardous chemical leaks, natural disasters, fires, explosions, unscheduled or unplanned downtime, transportation interruptions, cyber-attacks and public health crises such as COVID-19); and
Possible disruption of our business or increases in the cost of doing business resulting from terrorist activities or global conflicts.

Should one or more of these risks materialize or if the consequences worsen, or if the underlying assumptions prove incorrect, actual results could differ materially from those currently forecasted or expected. We disclaim any intention or obligation to update or revise any forward-looking statement whether as a result of changes in information, future events or otherwise.

Operating Income Overview

In the third quarter of 2023 operating income increased to $6.6 million compared to $5.9 million in the third quarter of 2022. The increase in operating income in the third quarter of 2023 compared to 2022 is due to higher Security Products sales and improved gross margin percentages at both segments, partially offset by lower Marine Components sales. Operating income for the first nine months of 2023 was $18.0 million compared to $20.0 million in the first nine months of 2022. The decrease in operating income in the first nine months of 2023 compared to 2022 is primarily due to lower Marine Components sales and, to a lesser extent, lower Security Products sales somewhat offset by an improvement in Marine Components gross margin percentage.

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

 

September 30, 

 

2022

%  

2023

%

(Dollars in thousands)

 

Net sales

$

42,864

 

100.0

%  

$

40,355

 

100.0

%

Cost of sales

 

30,928

 

72.2

 

27,736

 

68.7

Gross margin

 

11,936

 

27.8

 

12,619

 

31.3

Operating costs and expenses

 

6,016

 

14.0

 

6,074

 

15.1

Operating income

$

5,920

 

13.8

%  

$

6,545

 

16.2

%

Nine months ended

 

September 30, 

 

    

2022

    

%

    

2023

    

%

(Dollars in thousands)

 

Net sales

$

126,589

 

100.0

%  

$

118,122

 

100.0

%

Cost of sales

 

88,944

 

70.3

 

82,526

 

69.9

Gross margin

 

37,645

 

29.7

 

35,596

 

30.1

Operating costs and expenses

 

17,674

 

13.9

 

17,644

 

14.9

Operating income

$

19,971

 

15.8

%  

$

17,952

 

15.2

%

Net sales. Net sales decreased $2.6 million and $8.5 million in the third quarter and in the first nine months of 2023, respectively, compared to the same periods in 2022 due to lower Marine Components sales primarily to the towboat market, partially offset by higher Security Products sales in the third quarter of 2023. See segment discussion below.

Cost of sales and gross margin. Cost of sales as a percentage of sales decreased 3.5% and .4% in the third quarter and for the first nine months of 2023, respectively, compared to the same periods in 2022. As a result, gross margin as a percentage of sales increased over the same periods. Gross margin percentage increased in the third quarter and for the first nine months of 2023 compared to the same periods in 2022 primarily due to higher gross margin percentages at both Security Products and Marine Components for the third quarter of 2023. Higher gross margin percentage at Marine

- 12 -

Components in the first quarter of 2023 also favorably impacted the nine-month comparative period. 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 third quarter and for the first nine months of 2023 were comparable to the same periods in 2022. Operating costs and expenses as a percentage of net sales increased for the third quarter and the first nine months of 2023 due to decreased coverage of operating costs and expenses as a result of lower sales.

Operating income. As a percentage of net sales, operating income comparisons for the third quarter and first nine months compared to the same periods of 2022 were primarily impacted by the factors impacting sales, cost of sales, gross margin and operating costs. See segment discussion below.

Interest income. Interest income increased $.5 million and $1.9 million in the third quarter and for the first nine months of 2023, respectively, compared to the same periods in 2022 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 10 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

    

Nine months ended

    

 

September 30, 

%  

September 30, 

%  

 

    

2022

    

2023

    

Change

    

2022

    

2023

    

Change

 

(Dollars in thousands)

(Dollars in thousands)

 

Security Products:

 

  

 

  

 

  

 

  

 

  

 

  

Net sales

$

28,493

$

31,376

 

10

%  

$

86,911

$

84,390

 

(3)

%

Cost of sales

 

20,241

 

21,347

 

5

 

59,629

 

58,475

 

(2)

Gross margin

 

8,252

 

10,029

 

22

 

27,282

 

25,915

 

(5)

Operating costs and expenses

 

3,348

 

3,533

 

6

 

9,637

 

9,906

 

3

Operating income

$

4,904

$

6,496

 

32

$

17,645

$

16,009

 

(9)

Gross margin

 

29.0

%  

 

32.0

%  

 

31.4

%  

 

30.7

%  

  

Operating income margin

 

17.2

 

20.7

 

 

20.3

 

19.0

 

  

Security Products. Security Products net sales increased 10% in the third quarter of 2023 compared to the same period in 2022. Relative to prior year, third quarter sales were $3.9 million higher to the government security market, partially offset by $.6 million lower sales to the office furniture market and $.4 million lower sales to the gas station security market. Security Products net sales decreased 3% in the first nine months of 2023 compared to the same period in 2022. Relative to prior year, sales for the first nine months were $1.4 million lower to the office furniture market, $1.1 million lower to the government security market, $.5 million lower to the gas station security market and $.4 million lower to the healthcare market, partially offset by $1.2 million higher sales to distributors.

Gross margin as a percentage of net sales increased for the third quarter of 2023 compared to the same period in 2022 primarily due to increased sales volumes and lower cost of sales percentage as a result of lower raw materials, shipping and overtime costs. Operating income as a percentage of net sales increased in the third quarter of 2023 compared to the same period in 2022 due to the factors impacting gross margin, partially offset by increased operating costs and expenses, including higher employee salaries and benefits of $.2 million. Gross margin as a percentage of net sales for the first nine months of 2023 decreased as compared to the same period in 2022 primarily due to effects of lower sales and decreased coverage of fixed costs as a result of lower sales, partially offset by the favorable increase in gross margin during

- 13 -

the third quarter as discussed above. Operating income as a percentage of net sales decreased in the first nine months of 2023 compared to the same period in 2022 due to the factors impacting gross margin, as well as increased operating costs and expenses including higher employee salaries and benefits of $.2 million noted above.