CompX International Inc. — Q2 2020 Form 10-Q
Business and period: CompX manufactures security products and recreational marine components. This unaudited report covers the quarter and six months presented as ended June 30, 2020; the company notes its actual quarter ended June 28, 2020. Results are compared with the corresponding 2019 periods. Amounts below are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $23.800 | $33.730 | $56.111 | $64.907 |
| Gross margin | $7.366 (30.9%) | $10.939 (32.4%) | $17.797 (31.7%) | $20.563 (31.7%) |
| Operating income | $2.369 (10.0%) | $5.622 (16.7%) | $7.389 (13.2%) | $9.913 (15.3%) |
| Net income | $2.065 | $4.895 | $6.336 | $8.881 |
| Diluted EPS | $0.17 | $0.39 | $0.51 | $0.71 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $4.945 | $5.928 |
Q2 sales fell about 29%, while operating and net income each fell about 58% year over year. For the first six months, sales declined about 14%, operating income about 25%, and net income about 29%. Q2 gross margin percentage declined 1.5 percentage points; the six-month percentage was unchanged.
Segments and operating drivers
- Security Products: Q2 sales were $18.573 million, down 31%; operating income was $3.361 million, down 44%. Lower demand included government security, transportation and distribution customers. Less favorable mix and lower-volume fixed-cost coverage reduced Q2 gross margin percentage.
- Marine Components: Q2 sales were $5.227 million, down 23%; operating income was $0.799 million, down 38%. Reduced sales to towboat, engine manufacturing and industrial markets and lower-volume overhead coverage weighed on results.
- For the six-month period, Security Products sales declined 15% and operating income 18%; Marine Components sales declined 9% and operating income 14%.
Liquidity, cash flow and capital
- At June 30, cash and cash equivalents were $62.450 million, versus $63.255 million at year-end 2019. Current assets were $96.470 million and current liabilities $11.721 million.
- Six-month operating cash flow was $4.945 million; capital expenditures were $0.861 million and dividends paid were $2.489 million. Cash decreased by $0.805 million overall.
- Inventory increased from $18.348 million at year-end to $21.818 million, reflecting an intentional build; days in inventory rose from 81 to 121. Management expects inventories to decline as production aligns with demand.
- No borrowings are listed on the balance sheet. The company held a $30.5 million unsecured demand note receivable from affiliate Valhi, under a facility of up to $40 million, bearing interest at prime plus 1%; principal is due on demand but not before December 31, 2021. Affiliate credit risk is noted.
- The board increased the regular quarterly dividend from $0.07 to $0.10 per share beginning in Q1 2020. Future dividends remain discretionary. Capital project commitments were $0.4 million.
Outlook, risks and notable items
Management attributed the Q2 downturn to COVID-19-related government closures, customer shutdowns or reduced production, and postponed shipments. A Chicago-area facility closed for one week in late April and then returned to normal operating rates; the temporary closure had minimal production and shipping impact. Supply-chain disruption had been limited at the time of filing, but further facility closures remained possible.
Management expected 2020 revenue and operating income to be below 2019 levels and identified Q2 as likely the most affected quarter. The remainder-of-year impact was uncertain and dependent on customer recovery, consumer demand and possible disruptions. The company reduced production staffing to anticipated second-half demand, controlled expenses and capital projects, and reported approximately $62.5 million of cash as a liquidity buffer. No quantified earnings or revenue guidance was provided.
Other risks cited include demand uncertainty, raw-material and energy costs, competition, supply-chain and operational interruptions, regulation, litigation, intellectual property, tax matters and broader economic conditions. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The CARES Act’s impact on the tax provision was assessed as not material.
Key facts for investors to verify
- Whether customer activity and demand recovered as anticipated after Q2, particularly in transportation, office furniture and cabinetry markets.
- Whether inventory levels and days in inventory declined as planned, and whether the build created any obsolescence or working-capital pressure.
- Ongoing exposure to Valhi through the $30.5 million affiliate note, including repayment timing, credit risk and interest terms.
- Cash generation, capital spending and the sustainability of the $0.10 quarterly dividend amid continued uncertainty.
- Any subsequent COVID-19-related operating interruptions, supply-chain issues or changes to the company’s below-2019 full-year outlook.