CompX International Inc. — Q2 2017 Form 10-Q
Business context and period. CompX manufactures security products and recreational marine components. This unaudited report covers the quarter and six months ended June 30, 2017; the company notes its actual quarter ended July 2, 2017. CompX is 87% owned by NL Industries.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $30.0 million | $27.1 million | $60.0 million | $54.2 million |
| Gross profit / margin | $9.5 million / 31.7% | $8.5 million / 31.3% | $19.2 million / 32.0% | $16.7 million / 30.8% |
| Operating income / margin | $4.6 million / 15.3% | $3.7 million / 13.7% | $9.1 million / 15.2% | $7.1 million / 13.0% |
| Net income | $3.3 million | $2.4 million | $6.5 million | $4.6 million |
| Diluted EPS | $0.27 | $0.20 | $0.52 | $0.37 |
- Cash flow: First-half operating cash flow was $4.3 million, versus $1.9 million in 2016. Investing cash flow was a $13.7 million use, including $1.6 million of capital expenditures and $12.1 million of net lending to affiliate Valhi. Dividends paid were $1.2 million.
- Liquidity and balance sheet: At June 30, cash was $22.5 million, current assets $50.7 million, current liabilities $11.3 million, and total equity $131.1 million. Cash declined $10.6 million from year-end 2016, while the affiliate note receivable rose to $39.5 million. The balance sheet reports no debt. Capital-project purchase commitments were $0.6 million.
- Related-party financing: The unsecured revolving demand note to Valhi permits loans up to $40 million; principal is due on demand but not before December 31, 2018. Its rate is prime plus 1%. CompX recorded $0.4 million of related interest income in Q2 and $0.8 million for the half-year.
Changes and management commentary
- Q2 and first-half sales each increased about 11% year over year. Management attributed the increase mainly to higher Security Products volumes for existing government customers; weaker recreational-transportation customer sales partly offset the growth.
- Security Products sales grew 12% in both periods. First-half segment operating income rose 19%, supported by higher production volumes and manufacturing efficiencies. Marine Components sales rose 1% in Q2 and 4% for the half, but segment operating income declined 11% and 3%, respectively, amid product/customer mix and temporary personnel-turnover inefficiencies.
- Interest income increased substantially, primarily reflecting the Valhi note. The effective tax rate was approximately 35%.
Outlook, risks and other items
- Management expects government-security sales to moderate in the second half and transportation-market sales to remain soft, but expects full-year 2017 security-product and marine-product sales to meet or exceed 2016 levels. No quantitative earnings or margin guidance is provided.
- Management cites demand changes, raw-material and energy costs and ability to pass them through, low-cost competition, customer and product mix, manufacturing disruptions, regulation, tax matters, litigation, economic conditions, and cyber or other operational interruptions as risks. It says there were no material changes to previously disclosed risk factors or contractual obligations.
- Management believes available cash, operating cash flow and access to external financing will meet liquidity needs for the next 12 months and five years. This assessment includes possible discretionary lending to affiliates.
- Revenue standard adoption was expected in Q1 2018 using the modified retrospective method; management expected minimal revenue impact but was still assessing disclosure effects. The company planned early adoption of the simplified goodwill impairment standard for its 2017 tests.
- Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Investor facts to verify
- Valhi’s ability and willingness to repay the $39.5 million unsecured affiliate receivable, its demand terms, and the impact of further discretionary lending on CompX’s cash balance.
- Whether government-customer demand moderates as anticipated and whether transportation-market weakness persists.
- Whether Marine Components can address personnel-related inefficiencies and improve margins.
- The company’s reported absence of debt, together with the $0.6 million capital-project commitments and any changes in liquidity or dividend policy.