UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES
EXCHANGE ACT OF 1934 –

For the fiscal year ended December 31, 20162019

☐ 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)

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

Securities registered pursuant to Section 12(g) of the Act: None.

Indicate by check mark:

If the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐    No  ☒

If the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    No  ☒

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 (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No   ☐

Whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registration was required to submit and post such files).    Yes  ☒    No   ☐

If disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    Yes  ☒   No   ☐

Whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, (as definedsmaller reporting company, or emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Act).Exchange Act.

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.  ☐

Whether the Registrant is a shell Company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

The aggregate market value of the 1.7 million shares of voting stock held by nonaffiliates of CompX International Inc. as of June 30, 201628, 2019 (the last business day of the Registrant’s most recently completed second fiscal quarter) approximated $19.0$28.3 million.

As of February 24, 2017, 2,419,10720, 2020, registrant had 12,443,057 shares of Class A common stock, were$.01 par value per share, outstanding.

Documents incorporated by reference

The information required by Part III is incorporated by reference from the Registrant’s definitive proxy statement to be filed with the Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report.

PART I

General

CompX International Inc. (NYSE MKT:American: CIX), incorporated in Delaware in 1993, is a leading manufacturer of security products used in the recreational transportation, postal, office and institutional furniture, cabinetry, tool storage, healthcare and a variety of other industries.  We are also a leading manufacturer of stainless steel exhaust systems, gauges, throttle controls, wake enhancement systems and trim tabs for the recreational marine industry. Our products are principally designed for use in medium to high-end product applications where design, quality and durability are valued by our customers.

At December 31, 2016,2019, (i) NL Industries, Inc. (NYSE: NL) owns 87%86% of our outstanding common stock, Valhi, Inc. (NYSE: VHI) owns 83% of NL’s outstanding common stock and a subsidiary of Contran Corporation owns 93%92% of Valhi’s outstanding common stock.  As discussed in Note 1 to our Consolidated Financial Statements, Lisa K. Simmons, and Serena Simmons Connelly and a trust established for the benefit of Ms. Simmons and Ms. Connelly and their children and for which a third-party financial institution serves as trustee may be deemed to control Contran, Valhi, NL and us.

Our corporate offices are located at Three Lincoln Centre, 5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240.  Our telephone number is (972) 448-1400.  We maintain a website at www.compx.com.

Unless otherwise indicated, references in this report to “we,” “us,” or “our” refer to CompX International Inc. and its subsidiaries taken as a whole.

Forward-Looking Statements

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended.  Statements in this Annual 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 Annual Report and those described from time to time in our other filings with the U.S. Securities and Exchange Commission (the “SEC”) and include, but are not limited to, the following:

- 2 -

Net Sales. Net sales for 2016 were comparableincreased approximately $6.0 million in 2019 compared to 2015 because our Security Products segment was able2018 primarily due to substantially replace revenue for a government security end-user project which did not recur in 2016 with a new project with the same customer.higher Marine Components also contributed with higher sales to the waterski/wakeboard boattowboat market. Relative changes in selling prices did not have a material impact on net sales comparisons.

Net sales increased approximately $5.2$6.2 million from 2014in 2018 compared to 2015 led by strong demand within2017 primarily due to higher Marine Components sales volumes to manufacturers of ski/wakeboard boats and larger center-console boats, and to a lesser extent higher Security Products from existing government customers.  Marine Components also contributed to the increase primarily through higher sales to the waterski/wakeboard boat market.certain markets, particularly transportation and office furniture. Relative changes in selling prices did not have a material impact on net sales comparisons.

- 1312 -

Cost of Goods SoldSales and Gross Profit.Margin.  Cost of goods sold for 2016 was down from 2015 on comparable sales resultingincreased in an increase in gross profit. As a percentage2019 compared to 2018 due to the effects of increased sales gross profit for 2016 was favorable to 2015 due primarily to higher variable margins resulting from favorable customer and product mixvolumes for both Security Products and Marine Components.Components and increased labor costs at Security Products.  As a result, gross margin as a percentage of sales decreased over the same period. The decrease in gross margin percentage is the result of the decline in Security Products gross margin percentage in 2019 as compared to 2018.

Cost of goods sold and gross profit bothsales increased from 20142017 to 20152018 primarily due to increased sales volumes.  Asvolumes for both the Security Products and Marine Components segments. Gross margin dollars and gross margin as a percentage of sales increased from 2017 to 2018 primarily due to greater fixed cost leverage facilitated by higher production volumes for each of goods sold and resulting gross profit for 2015 were comparable to 2014 as improved variable margins and manufacturing efficiencies attributable to Marine Components were substantially offset by slightly lower variable margins and increased fixed costs within Security Products.our business segments.

Operating Costs and Expenses. Operating costs and expenses consist primarily of sales and administrative-related personnel costs, sales commissions and advertising expenses directly related to product sales and administrative costs relating to business unit and corporate management activities, as well as gains and losses on plant,sales of property and equipment.  Operating costs and expenses in 2016 was comparable to 2015 on an absolute basis and as a percentage of sales. Operating costssales were comparable in 2017, 2018 and expenses increased slightly from 2014 to 2015 primarily as a result of increased personnel costs for Security Products.  2019.

Operating Income. As a percentage of net sales, operating income decreased from 2018 to 2019 while operating income increased slightly from 20152017 to 2016 while 2015 was comparable to 2014.2018. Operating margins were primarily impacted by the factors impacting cost of goods sold,sales, gross margin and operating costs discussed above.  

General. Our profitability primarily depends on our ability to utilize our production capacity effectively, which is affected by, among other things, the demand for our products and our ability to control our manufacturing costs, primarily comprised of labor costs and materials.  The materials used in our products consist of purchased components and raw materials some of which are subject to fluctuations in the commodity markets such as zinc, brass and stainless steel. Total material costs represented approximately 45% of our cost of sales in 2016,2019, with commodity-related raw materials accounting for approximately 10%13% of our cost of sales. During 20152018, markets for the primary commodity-related raw materials used in the manufacture of our locking mechanisms, primarily zinc and 2016,brass, generally strengthened, but moderated at the end of 2018 and remained relatively stable through 2019. Over that same period, the market for stainless steel, the primary raw material used for the manufacture of marine exhaust headers and pipes and wake enhancement systems, remained relatively stable. While we expect the markets for our primary commodity-related raw materials including zinc, brass and stainless steel, have generally been stable and relatively soft compared to historical levels. Markets for our primary commodity-related raw materials are expected to remain relatively stable into 2017 with the possible exception of zinc, which has increased in price over the final months of 2016. during 2020, we recognize that economic conditions could introduce renewed volatility on these and other manufacturing materials.

We occasionally enter into short-term commodity-related raw material supply arrangements to mitigate the impact of future increases in commodity related raw material costs.  See Item 1 - “Business- Raw Materials.”

Interest Income. Interest income in 2019 increased compared to 2018 primarily due to higher average loan balances and higher interest rates on our loan to an affiliate as well as higher average investment balances and higher interest rates on our cash investments. Interest income in 2018 increased compared to 2017 primarily due to higher interest rates on our loan to an affiliate as well as our cash investments. See Note 9 to the Consolidated Financial Statements.

Provision for income taxes. A tabular reconciliation of our actual tax provision to the U.S. federal statutory income tax rate of 35% is included in Note 7 to the Consolidated Financial Statements.  As a member of the group of companies consolidated for U.S. federal income tax purposes with Contran, the parent of our consolidated U.S. federal income tax group, we compute our provision for income taxes on a separate company basis, using the tax elections made by Contran.

Our effective income tax rate was 37%23% in 20142017, 25% in 2018 and 24% in 2019. On December 22, 2017, H.R.1, formally known as the “Tax Cuts and Jobs Act” (“2017 Tax Act”) was enacted into law. This tax legislation, among other changes, (i) reduced the U.S Federal corporate income tax rate from 35% to 21% effective January 1, 2018; (ii) eliminated the domestic production activities deduction beginning in 20152018; and 2016.(iii) allowed the expensing of certain capital expenditures. Following the enactment of the 2017 Tax Act, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) 118 to provide guidance on the accounting and reporting impacts of the 2017 Tax Act. SAB 118 required that companies account for changes related to the 2017 Tax Act in

- 13 -

the period of enactment unless the impact of such changes could not be reasonably estimated. Such revaluation resulted in a non-cash deferred income tax benefit of $1.9 million recognized in continuing operations for the period ended December 31, 2017, reducing our net deferred income tax liability as of that date.  During 2018 we finalized our analysis of the 2017 Tax Act and recorded an immaterial adjustment within the defined measurement period. See Notes 7 and 10 to our Consolidated Financial Statements.

While our effective income tax rate for 2018 was favorably impacted by the reduction in the U.S. federal statutory income tax rate from 35% to 21%, our effective income tax rate was higher in 2018 as compared to 2017 due to the $1.9 million non-cash deferred income tax benefit recognized in 2017 resulting from the revaluation of our net deferred income tax liability discussed above. Our effective income tax rate was lower in 20152019 as compared to 20142018 primarily due to recognizing a decreasecurrent cash tax benefit of $0.2 million in our state2019 resulting from a deduction under the foreign derived intangible income provisions ($0.1 million of such current cash tax provisionbenefit is related to the scheduled reduction to the state tax rate in one of the jurisdictions in which we operate.  Our effective income tax rate in 2016 was comparable to our effective income tax rate in 2015. See Notes 7 and 10 to the Consolidated Financial Statements.  We currently expect our effective income tax rate for 2017 to be comparable to our effective income tax rate for 2016.2018).

- 14 -

Segment Results

The key performance indicator for our segments is the level of their operating income (see discussion below).  For additional information regarding our segments refer to Note 2 to theour Consolidated Financial Statements.

Security Products.  Security Products net sales decreasedincreased 1% to $94.7$99.3 million in 20162019 compared to $95.6$98.4 million in 2015. Sales for 2015 included approximately $6.3 million for a2018, primarily due to higher sales to government security end-user project which did not recurand medical cart manufacturing markets, partially offset by lower sales to the transportation, electronic control panel and distribution markets. As a percentage of sales, gross margin and operating income for 2019 declined as compared to 2018 primarily due to increased labor rates and associated payroll costs resulting from regional pressure on wages for certain skilled labor positions, partially offset by favorable medical costs.

Security Products net sales increased 2% to $98.4 million in 2016. During2018 compared to $96.6 million in 2017, primarily due to higher sales to the transportation and office furniture markets. As a percentage of sales, gross margin for 2018 increased slightly over 2017 due to lower production costs, including headcount reductions made during the second halfquarter of 2016, we were awarded a substantial new project for the same customer which began to ship in August2017, and was completed in December, totaling $5.8 million in net sales. Gross profit margins for 2016improved coverage of fixed costs over increased compared to 2015 on favorable variable margins resulting from relative changes in product and customer mix particularly in the fourth quarter.production volumes.  Operating costs and expenses for 20162018 were comparable to 2015.slightly lower than 2017.  As a result, Security Products operating income as a percentage of net sales for 20162018 exceeded 2017.

- 14 -

Marine Components. Marine Components net sales increased 26% in 2019 as compared to 20152018 primarily due to increased sales to the towboat market, primarily wake enhancement systems and surf pipes to an original equipment boat manufacturer. Gross margin as a percentage of sales in 2019 was comparable to 2018. Operating income as a percentage of net sales increased in 2019 compared to 2018 principally due to improved leverage on operating costs and expenses facilitated by higher production volumes.

Marine Components net sales increased 29% in 2018 as compared to 2017 as a result of continued strong demand for our products, particularly those sold to the factors impacting gross profitski/wakeboard boat market as well as to manufacturers of large center-console boats and operating costs and expenses discussed above.

Security Products net sales increased 5% to $95.6 million in 2015 compared to $91.4 million in 2014.  The increase in sales was primarily due to an increase of approximately $3.0 million in sales to existing governmentindustrial customers. Gross profit margin for 2015 decreased compared to 2014 due to relative changes in customer and product mix driving lower variable margins, and increased fixed costs.  Operating costs and expenses increased approximately $510,000 in 2015 compared to 2014 primarily as a result of increased personnel costs.  Security Products operating income as a percentage of net sales for 2015 decreasedincreased in 2018 compared to 2014 primarily as a result of the factors impacting gross profit and operating costs and expenses discussed above.

Marine Components.  Marine Components net sales increased 6% in 2016 as compared to 2015, while 2015 net sales increased 8% over 2014.  The increase in sales each year was primarily2017 principally due to improved demand for products sold to the ski/wakeboard boat market, including the continuing introduction of new product lines to that market.  As a percentage of net sales, gross margin and the operating income percentage for each period improved due to improved pricing, changes in customer and product mix, improved manufacturing efficiencies and increasedfixed cost leverage of fixed costs as a result offacilitated by higher production volumes.

- 15 -

Outlook. Outlook

We experienced robust demand2019 was a breakout year for our products in 2015 and 2016 buoyed by continued high demand from certain large existing customers, including significant projects for government security applications which are not expected to recur. We continue to benefit from innovation and diversification in our product offerings to the recreational boat markets served by our Marine Components segment which sustained the significant growth we experienced in the second half of 2018 for the full year of 2019. We expect growth of this segment to be more normalized in 2020. Our Security Products segment experienced modest sales growth in 2019; however we began to notice headwinds late in 2019 which may carry into 2020. In 2020, we plan to capitalize on the positive momentum our Marine Components segment has experienced over the last two years while maintaining strong results in our Security Products segment. We anticipate continued strong demand for our products in 2017, though we do not expect demand for government security applications to equal 2016 volumes. As in prior periods, we will continue to monitor general economic conditions and sales order rates and respond to fluctuations in customer demand through continuous evaluation of staffing levels and consistent execution of our lean manufacturing and cost improvement initiatives. 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 mitigate the impact of changes in demand as well as broaden our sales base.

Critical Accounting Policies and Estimates

We have based the accompanying “Management’s Discussion and Analysis of Financial Condition and Results of Operations” uponOur significant accounting policies are more fully described in Note 1 to our Consolidated Financial Statements. We prepared ourOur Consolidated Financial Statements have been prepared in accordanceconformity with GAAP.  In preparing our Consolidated Financial Statements, we are requiredaccounting principles generally accepted in the United States of America (GAAP) which requires us to make estimates, judgments, and judgments thatassumptions we believe are reasonable based on our historical experience, contract terms, observations of known trends in our company and the industry as a whole and information available from other outside sources. Our estimates affect the reported amounts of assets and liabilities and disclosurerelated disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amountamounts of revenuesrevenue and expensesexpense during the reportedreporting period. On an on-going basis, we evaluate our estimates, including those related to inventory reserves, the recoverability of long-lived assets (including goodwill and other intangible assets) and the realization of deferred income tax assets.  We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, theActual results of which form the basis for making judgments about the reported amounts of assets, liabilities, revenues and expenses.  Our actual future results mightmay differ from previously estimated amounts under different assumptions or conditions.initial estimates.

We believe the followingmost critical accounting policies affect our moreand estimates involving significant judgments and estimates usedprimarily relate to the considerations in the preparationimpairment assessments for goodwill and certain long-lived assets. We have discussed the development, selection and disclosure of our Consolidated Financial Statements and are applicable to allcritical accounting estimates with the Audit Committee of our operating segments:Board of Directors.

- 15 -

When performing a quantitative assessment, considerable management judgment is necessary to estimate future cash flows. Assumptions used in our impairment evaluations, such as forecasted growth rates and our cost of capital, are consistent with our internal projections and operating plans. However, different assumptions and estimates could result in materially different findings which could result in the recognition of a material goodwill impairment.

When performing a qualitative assessment considerable management judgment is necessary to evaluate the qualitative impact of events and circumstances on the fair value of a reporting unit.  Events and circumstances considered in our impairment evaluations, such as historical profits and stability of the markets served, are consistent with factors utilized with our internal projections and operating plan.  However, future events and circumstances could result in materially different findings which could result in the recognition of a material goodwill impairment.

- 16 -Evaluations of possible impairment utilizing the two-step quantitative impairment test require us to estimate, among other factors: forecasts of future operating results, revenue growth, operating margin, tax rates, capital expenditures, depreciation, working capital, weighted average cost of capital, long-term growth rates, risk premiums, terminal values, and fair values of our reporting units and assets.  The goodwill impairment test is subject to uncertainties arising from such events as changes in competitive conditions, the current general economic environment, material changes in growth rate assumptions that could positively or negatively impact anticipated future operating conditions and cash flows, changes in the discount rate, and the impact of strategic decisions.  If any of these factors were to materially change such change may require revaluation of our goodwill.  Changes in estimates or the application of alternative assumptions could produce significantly different results.

In 2019, we used the qualitative assessment for our annual impairment test and determined it was not necessary to perform the quantitative goodwill impairment test, as we concluded it is more-likely- than-not the fair value of the security products reporting unit exceeded its carrying amount.  See Notes 1 and 5 to our Consolidated Financial Statements.

Liquidity and Capital Resources

Summary

Our primary source of liquidity on an on-going basis is our cash flow from operating activities, which is generally used to (i) fund capital expenditures, (ii) repay short-term or long-term indebtedness incurred primarily for capital expenditures, business combinations or buying back shares of our outstanding stock and (iii) provide for the payment of dividends (if declared).  From time-to-time, we may incur indebtedness to fund capital expenditures, business combinations or other investment activities.  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.

Consolidated cash flows

Operating activities.  Trends in cash flows from operating activities, excluding changes in assets and liabilities, for the last three years have generally been similar to the trends in our earnings.  Depreciation and amortization waswere comparable in each of 2016, 20152019, 2018 and 2014.2017. See Note 1 to theour Consolidated Financial Statements.

Changes in assets and liabilities result primarily from the timing of production, sales and purchases.  Such changes in assets and liabilities generally tend to even out over time.  However, year-to-year relative changes in assets and liabilities can significantly affect the comparability of cash flows from operating activities. Cash provided by operating activities was comparable at $13.9 million and $13.5$18.5 million in 20162019 compared to $17.2 million in 2018.  The $1.3 million increase in cash provided by operating activities is primarily the net result of:  

as higherCash provided by operating activities was $17.2 million in 2018 compared to $12.6 million in 2017.  The $4.6 million increase in cash provided by operating activities is primarily the net result of:  

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 increaseddecreased from December 31, 20152018 to December 31, 20162019 primarily as a result of the timing of sales and collections in the last month of 20162019 as compared to 2015.2018.  For comparative purposes, we have provided 20142017 numbers below.

As shown below, our average number of days in inventory increased slightly fromat December 31, 20152019 is comparable to December 31, 2016 after assuming more normalized levels following an intentional inventory build in each of our segments at the end of 2014.2018. The variability in days in inventory among our segments primarily relates to the complexity of

- 17 -

the production processes, and therefore the length of time it takes to produce end products, as well as seasonal cycles.  For comparative purposes, we have provided 20142017 numbers below.

Investing activities.  Capital expenditures have primarily emphasized improving our manufacturing facilities and investing in manufacturing equipment, utilizing new technologies and increased automation of the manufacturing process, to provide for increased productivity and efficiency in order to meet expected customer demand and properly maintain our facilities and technology infrastructure.  Capital expenditures were $2.8 million in 2014, $4.22017, $3.1 million in 20152018 and $3.2 million in 2016.2019.  See Note 2 to our Consolidated Financial Statements.  Capital expenditures in 2015 and 2016 include approximately $543,000 and $994,000, respectively, for an expansion to our Grayslake facility which was completed in April 2016.  Approximately $481,000 of our 2014 capital expenditures relates to the implementation of a new manufacturing and accounting system for our operating segments that was implemented in January 2014.  

Capital expenditures for 20172020 are estimated at approximately $3.6 million.$4.0 million primarily to maintain and improve the cost-effectiveness of our facilities and equipment.  Capital spending for 20172020 is expected to be funded through cash on hand and cash generated from operations.