Business context and reporting period
CompX International Inc. filed this Form 10-K for fiscal 2021, a 52-week year ending January 2, 2022 (presented as December 31, 2021). CompX manufactures security products and recreational marine components. NL Industries owned approximately 87% of CompX at year-end.
Financial performance and position
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net sales | $140.8 million | $114.5 million | +23% |
| Gross margin | $42.7 million; 30.3% | $32.8 million; 28.7% | Margin +1.6 percentage points |
| Operating income | $20.5 million; 14.6% | $11.8 million; 10.3% | +74% |
| Net income | $16.6 million | $10.3 million | +60% |
| Diluted EPS | $1.34 | $0.83 | +61% |
| Cash from operating activities | $10.5 million | $15.5 million | Down $5.0 million |
- Security Products sales rose 20% to $105.1 million; segment operating income increased 45% to $21.6 million. Marine Components sales rose 34% to $35.7 million; segment operating income increased 37% to $5.6 million.
- Year-end cash and cash equivalents were $76.6 million. Current assets were $120.2 million and current liabilities $16.4 million. The balance sheet reports no borrowings or other funded debt.
- CompX held an $18.7 million note receivable from affiliate Valhi, bearing interest at prime plus 1.0%. Net property and equipment was $29.2 million; goodwill was $23.7 million.
- Capital expenditures were $4.1 million. Cash dividends paid were $9.9 million ($0.80 per share), and share repurchases totaled $1.3 million.
Material changes versus comparable periods
Results rebounded from pandemic-related weakness in 2020: sales increased $26.3 million and operating income rose $8.7 million in 2021. Both segments benefited from higher demand and volumes. Security Products sales recovered to pre-pandemic levels by the second quarter of 2021; Marine Components sales had exceeded pre-pandemic levels beginning in the third quarter of 2020. Higher raw-material, labor and shipping costs tempered margin improvement, particularly in Marine Components, where gross margin percentage declined.
Operating cash flow fell despite higher earnings, chiefly due to a larger cash investment in receivables and inventory. Inventory increased to $25.6 million from $18.3 million, and consolidated days in inventory rose to 96 from 75. Days sales outstanding increased to 42 from 33.
Outlook, risks and unusual items
- Management expected strong demand to continue in 2022 and forecast increased net sales and operating income versus 2021. The company also expected rising production costs to pressure 2022 gross margins as higher-cost inventory is sold.
- Supply chains remained operational but faced longer lead times, shortages and transport delays; staffing challenges were particularly notable in Marine Components. Commodity prices, including zinc, brass and stainless steel, were expected to remain volatile. Price increases and surcharges were implemented, but their effectiveness was uncertain.
- Expected 2022 capital expenditures were approximately $6.7 million, primarily for capacity and capability improvements, funded from cash and operating cash flow. Purchase obligations totaled $30.7 million, primarily due in 2022.
- COVID-19, customer demand, commodity and labor costs, supply disruptions, competition, cybersecurity, climate-related costs and severe weather are among the disclosed risks. Management said it could not reasonably estimate COVID-19’s long-term effects.
- Related-party matters are significant: Valhi may repay the $18.7 million note on demand, subject to a provision that principal is not due before December 31, 2023. CompX also pays Contran $3.4 million annually for shared services and participates in group insurance arrangements.
- The USPS represented 16% of 2021 sales; the ten largest customers represented 51%. CompX reported no legal matters expected to have a material adverse effect. The auditor issued an unqualified opinion on the financial statements; management concluded disclosure controls and internal control over financial reporting were effective.
- The board declared a first-quarter 2022 dividend of $0.25 per share. Future dividends remain discretionary.
Important facts for investors to verify
- Whether 2022 demand, sales and operating-income expectations were realized, and how effectively price increases offset input-cost inflation.
- Whether inventory and receivables growth converted into cash, given lower operating cash flow and higher working-capital days in 2021.
- Credit exposure and terms of the Valhi affiliate note, including its demand feature, and the governance implications of the controlling ownership structure.
- Customer concentration, particularly USPS and the top-ten customer share, and any changes in major-customer demand.
- Progress on planned capital spending, production capacity and staffing, and the sustainability of dividend payments.