CompX International Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; amounts below are in millions unless stated otherwise. Interim statements are unaudited. CompX manufactures security locking products and marine components.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $40.4 | $42.9 | $118.1 | $126.6 |
| Gross margin | $12.6 | $11.9 | $35.6 | $37.6 |
| Gross margin rate | 31.3% | 27.8% | 30.1% | 29.7% |
| Operating income | $6.5 | $5.9 | $18.0 | $20.0 |
| Net income | $5.8 | $5.0 | $15.9 | $16.1 |
| Diluted EPS | $0.47 | $0.40 | $1.29 | $1.30 |
| Operating cash flow | Not stated | Not stated | $11.8 | $8.1 |
Q3 sales fell about 6%, while operating income rose about 11% and net income rose about 16%. For the first nine months, sales declined about 7%, operating income about 10%, and net income about 1%. Higher interest income supported earnings: nine-month interest income was $3.0 million versus $1.1 million.
Segments and drivers
- Security Products: Q3 sales increased 10% to $31.4 million and operating income rose 32% to $6.5 million, supported by government-security demand, higher volume, and lower raw-material, shipping, and overtime costs. Nine-month sales declined 3% and operating income declined 9% amid weaker demand in several markets.
- Marine Components: Q3 sales fell 38% to $9.0 million and operating income fell 38% to $1.7 million, principally from weakness in the towboat market. Nine-month sales declined 15% and operating income declined 7%. Lower material, shipping, and labor costs improved gross margin rates, partly offset by lower fixed-cost absorption.
Liquidity, capital and balance sheet
- At September 30, cash and cash equivalents were $17.6 million and marketable securities were $46.8 million, totaling $64.4 million. Current assets were $120.5 million and current liabilities $16.4 million.
- No debt is presented on the balance sheet. Stockholders’ equity was $165.1 million. Net property and equipment was $26.2 million.
- Nine-month operating cash flow was $11.8 million. Investing activities used $11.7 million, including $36.3 million of Treasury purchases, partly offset by maturities and affiliate-note collections. Financing activities used $9.2 million, entirely reported as dividends paid.
- Capital expenditures were $0.6 million for the nine months; management expected approximately $2.0 million for full-year 2023. Firm capital-project commitments were $0.2 million.
- CompX held a $12.0 million unsecured demand note receivable from affiliate Valhi at prime plus 1%; principal is due on demand, but no earlier than December 31, 2024. The company may lend up to $25 million at its discretion.
- Nine-month dividends were $0.75 per share, versus $2.50 per share in 2022, which included a $1.75 special dividend. No shares were repurchased in the first nine months of 2023; 523,647 shares remained authorized for repurchase.
Outlook, risks and other matters
Management expected slightly lower 2023 consolidated sales and operating income than in 2022, but full-year net income comparable to prior year due to higher interest income. It expected government-security sales to support Security Products, with sluggish demand in other markets; Marine Components demand, especially towboats, was expected to remain challenged amid higher interest rates and customer production cuts. Management anticipated improved Security Products margins to continue in Q4 and Marine Components’ full-year gross margin rate to be slightly favorable to 2022.
Management reported stable supply chains, easing component lead times, and generally stabilized or modestly declining commodity costs. It was adjusting labor and production to demand and monitoring inventory. Risks include demand weakness, raw-material and other cost changes, competition, supply-chain or operating disruptions, geopolitical and economic conditions, litigation, environmental and regulatory matters, and tax outcomes. Management stated liquidity should be sufficient for working capital, capital expenditures, debt service, dividends if declared, and discretionary affiliate lending over the next 12 months and five years; actual results or developments could weaken liquidity. No material changes to contractual obligations or market risks were reported. Disclosure controls were deemed effective, with no material quarterly change in internal control over financial reporting.
Most important facts to verify
- Whether government-security demand can offset persistent weakness in other Security Products markets, and whether the expected Q4 margin improvement occurs.
- How prolonged towboat and broader marine weakness affects Marine Components sales, margins, and inventory; marine inventory rose to 144 days from 95 days at year-end 2022.
- The quality and recoverability of the $12.0 million unsecured affiliate receivable, including demand terms, interest rate, and related-party governance.
- Whether cash generation, inventory management, and investment maturities support liquidity and planned capital spending; cash declined from $26.7 million at year-end while marketable securities increased.
- Future dividend decisions are discretionary; the filing provides no commitment to maintain a particular dividend.