CompX International Inc. — Q3 2018 Form 10-Q
Business and period: CompX manufactures security products, including locks and locking mechanisms, and marine components. This unaudited report covers the quarter and nine months ended September 30, 2018, compared with the same periods in 2017. Amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $30.0 | $27.0 | $90.8 | $86.9 |
| Gross profit | $9.6 | $8.2 | $30.3 | $27.4 |
| Gross margin | 31.9% | 30.4% | 33.4% | 31.5% |
| Operating income | $4.5 | $3.4 | $14.9 | $12.5 |
| Operating margin | 15.1% | 12.5% | 16.4% | 14.4% |
| Net income | $3.9 | $2.5 | $12.7 | $9.0 |
| Diluted EPS | $0.32 | $0.20 | $1.02 | $0.72 |
- Segment trends: Q3 Security Products sales were $24.5 million, up 7%; Marine Components sales were $5.5 million, up 33%. For the nine months, Security Products sales were $75.8 million, up 1%, and Marine Components sales were $15.0 million, up 24%.
- Cash flow: Nine-month operating cash flow was $12.8 million versus $8.9 million in 2017. Capital expenditures were $2.0 million; dividends paid were $1.9 million. Cash increased $14.1 million to $43.7 million.
- Liquidity and debt: Current assets were $75.2 million and current liabilities $13.2 million at September 30, 2018. No debt is reported on the balance sheet. The company said cash, operating cash flow and financing access should meet expected needs for the next 12 months and five years.
- Related-party note: The company had a $33.0 million receivable from Valhi under an unsecured revolving demand note with a $40 million limit, bearing interest at prime plus 1%. Principal is payable on demand, but not before December 31, 2019. Nine-month interest income from the loan was $1.6 million.
- Dividends: Cash dividends were $0.05 per share in Q3 and $0.15 per share for the nine months, unchanged from 2017.
Changes and management commentary
- Sales increased in both segments. Management attributed higher operating income mainly to increased sales, improved product and customer mix in Security Products, manufacturing efficiencies and better fixed-cost absorption from higher production volumes.
- Management said full-year 2018 sales and operating earnings for both segments were expected to exceed 2017, citing strong Q3 performance and marine growth from new offerings. No numeric forecast was provided.
- Operating cash flow improved, helped by higher operating income, interest receipts and lower cash taxes; increased working-capital use partly offset these benefits. Marine Components’ days sales outstanding rose to 42 days from 31 at year-end 2017, mainly because of payment timing.
- The 2017 Tax Act reduced the federal corporate tax rate from 35% to 21% in 2018. The company completed its accounting analysis in Q3 and recorded an immaterial adjustment to prior provisional amounts.
- Effective July 17, 2018, NL converted all 10 million Class B shares into Class A shares, ending the dual-class voting structure for director elections. The company said the conversion did not affect earnings per share, financial position, results or liquidity. The board approved retirement of the converted Class B shares on October 31, 2018.
- Revenue recognition standard ASC 606 was adopted January 1, 2018 with no material impact. Lease standard ASC 842 is scheduled for adoption in Q1 2019; management did not expect a material balance-sheet effect.
Risks, contingencies and controls
Risks identified include product demand, raw-material and energy costs and ability to pass them on, low-cost competition, product and customer mix, new-product development, litigation, environmental and regulatory matters, tax outcomes, economic conditions, and operational interruptions including cyber-attacks. The filing reported no material changes in risk factors or contractual obligations from the 2017 annual report, and no material changes in market risks. Firm capital-project commitments were $0.6 million. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Assess the collectibility and concentration risk of the $33.0 million unsecured affiliate receivable, its terms, and the related-party governance arrangements.
- Monitor marine demand, new-product traction, and whether management’s expectation of full-year sales and earnings growth is achieved.
- Track receivables and working capital, particularly the elevated Marine Components collection period, and its effect on cash flow.
- Evaluate gross-margin sustainability amid raw-material costs, competitive pricing, product mix and reliance on production-volume leverage.
- Review subsequent filings for the lease-standard adoption impact and any changes to the company’s outlook or liquidity assessment.