CompX International Inc. — FY 2016 Form 10-K
Business context and reporting period. CompX manufactures security products, including cabinet locks and locking mechanisms, and recreational marine components, including exhaust systems, gauges, controls and trim tabs. Its two segments are Security Products and Marine Components. The report covers the fiscal year presented as ended December 31, 2016; the actual fiscal year ended January 1, 2017 and comprised 52 weeks. Fiscal 2015 comprised 53 weeks. CompX is 87% owned by NL Industries.
Financial performance and position
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Net sales | $108.9 million | $109.0 million |
| Gross profit / margin | $35.2 million / 32% | $33.4 million / 31% |
| Operating income / margin | $15.6 million / 14% | $14.0 million / 13% |
| Net income | $10.5 million | $9.1 million |
| Diluted earnings per share | $0.84 | $0.73 |
| Cash from operating activities | $13.9 million | $13.5 million |
| Capital expenditures | $3.2 million | $4.2 million |
| Cash dividends per share | $0.20 | $0.20 |
- Gross profit increased 5% and operating income increased 11% despite essentially flat sales. Management attributed improvement mainly to favorable customer and product mix and continued Marine Components margin improvement.
- Security Products sales were $94.7 million, down 1%; segment operating income was $20.0 million, up 8%. Marine Components sales were $14.2 million, up 6%; segment operating income was $1.7 million, up 19%.
- Fourth-quarter 2016 sales were $26.3 million versus $25.7 million in Q4 2015; operating income was $4.0 million versus $2.6 million, and net income was $2.9 million versus $1.7 million.
- Year-end cash and cash equivalents were $33.2 million, down from $52.3 million. Current assets were $59.2 million and current liabilities $13.3 million. Total assets were $144.0 million and stockholders’ equity $125.8 million.
- CompX reported no debt at year-end. Investing cash outflow was $30.6 million, largely reflecting net advances to Valhi under a related-party note. The outstanding balance was $27.4 million; the unsecured facility permits loans up to $40 million, bears interest at prime plus 1%, and principal is payable on demand but not before December 31, 2018.
Changes, outlook and risks
- In Security Products, a $6.3 million government project in 2015 did not recur, but a replacement project for the same customer generated $5.8 million of 2016 sales and shipped August through December. Management does not expect government-security demand to equal 2016 levels in 2017.
- Management anticipated continued strong overall product demand in 2017, supported in part by Marine Components products for the ski/wakeboard boat market. It planned to continue lean-manufacturing and cost-improvement efforts and estimated 2017 capital expenditures of approximately $3.6 million, funded by cash and operating cash flow.
- Management expected the 2017 effective tax rate to be comparable to 2016’s 35%. The board declared a first-quarter 2017 dividend of $0.05 per share; future dividends remain discretionary.
- Key risks include mature and competitive markets, pricing pressure, customer and project concentration, and commodity-cost volatility, particularly zinc, brass and stainless steel. Commodity-related raw materials were about 10% of 2016 cost of sales; total materials, including purchased components, were about 45%. CompX does not hedge commodity costs.
- The ten largest customers represented approximately 46% of 2016 sales; the U.S. Postal Service represented 14% and Harley-Davidson 11%. A customer loss or reduced project demand could materially affect results.
- CompX reported no goodwill impairment in 2016. It identified no long-lived-asset impairment indicators. Management believed cash and operating cash flow would meet liquidity needs, but warned that materially different operating results could adversely affect liquidity.
- CompX is jointly and severally liable under applicable law for federal income taxes of the Contran Tax Group for periods of membership; NL has agreed to indemnify CompX for amounts exceeding its tax-sharing-agreement liability. The company also participates in group insurance arrangements with potential shared-loss exposure if coverage is exhausted. Management did not expect pending legal matters 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 auditor did not attest to internal-control effectiveness.
Important facts for investors to verify
- Valhi’s creditworthiness, repayment capacity and the terms, demandability and ongoing balance of CompX’s $27.4 million unsecured related-party receivable.
- Whether replacement government projects and broader customer demand can offset the expected decline in government-security volumes.
- Customer concentration and the durability of Marine Components growth, margins and demand in the recreational boating market.
- Exposure to increases in commodity and other input costs, and CompX’s ability to recover those costs through pricing or efficiency gains.
- Cash availability after affiliate lending, planned capital spending, contractual commitments and dividends; confirm the board’s future dividend decisions.
- Potential effects of Contran tax-group obligations, related-party service and insurance arrangements, and future accounting-standard adoption.