United States

Securities and Exchange Commission

Washington, DC 20549

 

FORM N-Q

 

QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF

REGISTERED MANAGEMENT INVESTMENT COMPANY

 

Investment Company Act file number 811-00179

 

Central Securities Corporation

(Exact name of registrant as specified in charter)

630 Fifth Avenue, Eighth Floor

New York, N.Y. 10111

(Address of principal executive offices)

 

Registrant’s telephone number including area code: 212-698-2020

 

Date of fiscal year end: December 31

Date of reporting period: September 30, 2018

 

 

 

 

 

 

Item 1. Schedule of Investments.

 

CENTRAL SECURITIES CORPORATION

Statement of Investments

September 30, 2018

(Unaudited)

 

COMMON STOCKS 93.3%

 

 Shares     Value 
    Banks 6.1%    
 280,000  Citigroup Inc. $20,087,200 
 180,000  JPMorgan Chase & Co.  20,311,200 
 270,000  Wells Fargo & Company  14,191,200 
       54,589,600 
         
    Communications Services 4.4%    
 15,000  Alphabet Inc. Class A (a)  18,106,200 
 200,000  Cogent Communications Holdings, Inc.  11,160,000 
 210,000  Liberty Global plc Class C (a)  5,913,600 
 200,000  Liberty Latin America Ltd. (a)  4,126,000 
       39,305,800 
         
    Consumer Discretionary 4.3%    
 13,000  Amazon.com, Inc. (a)  26,039,000 
 700,000  TRI Pointe Group, Inc. (a)  8,680,000 
 30,000  Wynn Resorts Ltd.  3,811,800 
       38,530,800 
         
    Diversified Financial 8.8%    
 150,000  American Express Company  15,973,500 
 400,000  The Bank of New York Mellon Corporation  20,396,000 
 10  Berkshire Hathaway Inc. Class A (a)  3,200,001 
 300,000  Capital One Financial Corporation  28,479,000 
 210,000  The Charles Schwab Corporation  10,321,500 
       78,370,001 
         
    Diversified Industrial 6.5%    
 400,000  Brady Corporation Class A  17,500,000 
 500,000  General Electric Company  5,645,000 
 700,000  Heritage-Crystal Clean, Inc. (a)  14,945,000 
 65,000  Roper Technologies, Inc.  19,253,650 
       57,343,650 
         
    Energy 5.6%    
 700,000  Hess Corporation  50,106,000 
         
    Health Care 5.1%    
 85,000  Johnson & Johnson  11,744,450 
 200,000  Medtronic plc  19,674,000 
 200,000  Merck & Co. Inc.  14,188,000 
       45,606,450 
         
    Insurance 24.3%    
 19,000  Alleghany Corporation (a)  12,398,070 
 200,000  Kemper Corporation  16,090,000 
 100,000  Kinsale Capital Group, Inc.  6,386,000 
 28,424  The Plymouth Rock Company, Inc. Class A (b)(c)  170,544,000 
 160,000  Progressive Corporation  11,366,400 
       216,784,470 

 

 

 

 

 Shares     Value 
    Metals and Mining 0.2%    
 150,000  Freeport-McMoRan Inc. $2,088,000 
         
    Real Estate 2.7%    
 700,000  Rayonier Inc.  23,667,000 
         
    Semiconductor 9.1%    
 450,000  Analog Devices, Inc.  41,607,000 
 840,000  Intel Corporation  39,723,600 
       81,330,600 
         
    Software and Services 1.3%    
 100,000  Microsoft Corporation  11,437,000 
         
         
    Technology Hardware and Equipment 14.4%    
 350,000  Coherent, Inc. (a)  60,266,500 
 295,000  Keysight Technologies, Inc. (a)  19,552,600 
 300,000  Motorola Solutions, Inc.  39,042,000 
 1,387,100  Ribbon Communications Inc. (a)  9,473,893 
       128,334,993 
         
    Utilities 0.5%    
 454,108  Star Group, L.P.  4,436,635 
         
 Total Common Stocks (cost $335,191,584)  831,930,999 

 

 

SHORT-TERM INVESTMENTS 6.7%

    Money Market Fund 1.5%    
 13,164,758  Fidelity Institutional Money Market Fund Treasury    
    Only Portfolio – Class I  13,164,758 
         
 Principal  U.S. Treasury Bills 5.2%    
$46,000,000  U.S. Treasury Bills 1.98% - 2.03%, due 10/4/18 – 10/18/18 (d)  45,974,540 
         
    Total Short-term Investments (cost $59,139,298)  59,139,298 
         
    Total Investments (cost $394,330,882)(100.0%)  891,070,297 
         
    Cash, receivables and other assets less liabilities (0.0%)  1,803 
         
    Net Assets (100.0%) $891,072,100 

 

(a) Non-dividend paying.

(b) Affiliate as defined in the Investment Company Act of 1940 and restricted. See Note 3 and Note 4.

(c) Valued based on Level 3 Inputs. See Note 2.

(d) Valued based on Level 2 Inputs. See Note 2.

 

 

See accompanying notes to statement of investments.

 

 

CENTRAL SECURITIES CORPORATION

NOTES TO STATEMENT OF INVESTMENTS

 

1. Security Valuation – Marketable common stocks are valued at the last or closing sale price or, if unavailable, at the closing bid price. Investments in money market funds are valued at net asset value per share. Treasury bills are valued at amortized cost, which approximates fair value. Securities for which no ready market exists are valued at estimated fair value pursuant to procedures adopted by the Board of Directors. The determination of fair value involves subjective judgments. As a result, using fair value to price a security may result in a price materially different from the price used by other investors or the price that may be realized upon the actual sale of the security.

 

As of September 30, 2018, the tax cost of investments was $394,330,882. Net unrealized appreciation was $496,739,415 consisting of gross unrealized appreciation and gross unrealized depreciation of $512,952,825 and $16,213,410, respectively.

 

2. Fair Value Measurements – The Corporation’s investments are categorized below in three broad hierarchical levels based on market price observability as follows:

·Level 1 – Quoted prices in active markets for identical investments;
·Level 2 – Other significant observable inputs obtained from independent sources, for example, quoted prices in active markets for similar investments;
·Level 3 – Significant unobservable inputs including the Corporation’s own assumptions based upon the best information available. The Corporation’s only Level 3 investment is The Plymouth Rock Company, Inc. Class A Common Stock (“Plymouth Rock”).

 

The designated Level for a security is not necessarily an indication of the risk associated with investing in that security.

 

The Corporation’s investments as of September 30, 2018 are classified as follows:

 

   Level 1   Level 2   Level 3   Total 
Common stocks $661,386,999   -  $170,544,000  $831,930,999 
Short-term investments  13,164,758   45,974,540   -   59,139,298 
Total investments $674,551,757  $45,974,540  $170,544,000  $891,070,297 

 

The following is a reconciliation of the change in the value of Level 3 investments:

 

Balance at December 31, 2017 $144,962,400 
Change in net unrealized appreciation of investments included in net increase in net assets resulting from operations  25,581,600 
Balance at September 30, 2018 $170,544,000 

 

Unrealized appreciation of Level 3 investments held as of September 30, 2018 increased by $25,581,600 during the nine months ended September 30, 2018, which is included in the above table.

 

In valuing the Plymouth Rock Level 3 investment as of September 30, 2018, management used a number of significant unobservable inputs to develop a range of possible values for the investment.  It used a comparable company approach that utilized the following valuation multiples from selected publicly traded companies: price-to-book value (range: 0.7 – 3.8); price-to-earnings (range: 7.7 – 103.5); and price-to-revenue (range: 0.5 – 1.7). Management also used a discounted cash flow model based on a forecasted return on equity ranging from 8%-9% and a weighted average cost of capital of 11%.  An independent valuation of Plymouth Rock’s shares was also considered. The value obtained from weighting the three approaches described above (with greater weight given to the comparable company approach) was then discounted for the lack of marketability by 20% and 40%, a range management believes market participants would apply.  The resulting range of values, together with the underlying support, other information about Plymouth Rock’s financial condition and results of operations, its corporate governance, the insurance industry outlook and transacted values in Plymouth Rock’s shares, were also considered. These values as multiples of Plymouth Rock’s book value were also considered. Based upon all of the above information, the Corporation’s directors selected the value for the investment, which implied a discount for lack of marketability in the higher end of the above range.

 

 

 

Significant increases (decreases) in the value of the price-to-book value multiple, price-to-earnings multiple, price-to-revenue multiple and return on equity in isolation would have resulted in a higher (lower) range of fair value measurements.  Significant increases (decreases) in the value of the discount for lack of marketability or weighted average cost of capital in isolation would have resulted in a lower (higher) range of fair value measurements.

 

3. Restricted Securities - The Corporation may from time to time invest in securities the resale of which is restricted. On September 30, 2018, the Corporation’s only restricted security consisted of 28,424 shares of Plymouth Rock Class A stock that were acquired on December 15, 1982 at a cost of $710,600. This security had a value of $170,544,000 at September 30, 2018, which was equal to 19.1% of the Corporation’s net assets. The Corporation does not have the right to demand registration of the Plymouth Rock shares.

 

4. Affiliated Companies – Plymouth Rock is an affiliated company as defined in the Investment Company Act of 1940 due to the Corporation’s ownership of 5% or more of the company’s outstanding voting securities. During the nine months ended September 30, 2018, unrealized appreciation from the Corporation’s investment in Plymouth Rock increased by $25,581,600 and the Corporation received dividends of $9,714,754 from Plymouth Rock. The Chief Executive Officer of the Corporation is a director of Plymouth Rock.

 

 

Item 2. Controls and Procedures.


(a) Disclosure Controls and Procedures. The Principal Executive and Financial Officers have concluded that the Registrant’s Disclosure Controls and Procedures are effective based on their evaluation of the Disclosure Controls and Procedures as of a date within 90 days of the filing date of this report.

(b) Internal Control Over Financial Reporting. During the last fiscal quarter, there was no significant change in the Registrant’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

 

 

Item 3. Exhibits.

(a) Certifications.

 

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

CENTRAL SECURITIES CORPORATION

 

 

By: /s/ Wilmot H. Kidd
        Chief Executive Officer

 

Date: October 31, 2018

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

By: /s/ Wilmot H. Kidd
        Chief Executive Officer

 

Date: October 31, 2018

By: /s/ Lawrence P. Vogel
        Vice President and Treasurer

 

Date: October 31, 2018