CompX International Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless otherwise noted. CompX manufactures security products and recreational marine components and is 87% owned by NL Industries.
Financial results
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $27.9 million | $25.8 million | +8% |
| Gross profit / margin | $8.6 million / 30.7% | $7.7 million / 30.1% | +11% gross profit |
| Operating income / margin | $3.7 million / 13.3% | $3.3 million / 12.8% | +13% |
| Net income | $2.4 million | $2.1 million | +13% |
| Diluted earnings per share | $0.19 | $0.17 | +$0.02 |
| Operating cash flow | $(3.0) million | $(2.3) million | Cash use increased $0.7 million |
| Capital expenditures | $0.8 million | $0.7 million | |
| Cash dividends paid | $0.6 million; $0.05 per share | $0.6 million; $0.05 per share |
Amounts are rounded; financial statements report dollars in thousands. Q1 2015 operating cash use reflected seasonal working-capital needs, including the timing of payables, and higher cash taxes. Cash declined $4.4 million from year-end to $41.2 million. The balance sheet reports no borrowings or debt; current assets were $73.1 million versus current liabilities of $10.4 million. Stockholders’ equity was $112.8 million.
Segments and period-over-period changes
- Security Products: Sales rose 7% to $24.7 million and operating income rose 5% to $4.9 million. Growth came mainly from existing government customers, with additional demand for fuel-security products and office equipment. Higher administrative and benefit costs tempered operating income.
- Marine Components: Sales rose 15% to $3.2 million. The segment moved from a $16,000 operating loss to $259,000 operating income, as demand from the waterski/wakeboard boat market and manufacturing efficiencies improved.
- Consolidated gross margin increased 0.6 percentage points. Management attributed the improvement primarily to Marine Components’ higher volumes, manufacturing efficiencies and fixed-cost leverage. Relative selling-price changes were not material.
Outlook, liquidity and risks
Management anticipated continued strong product demand during 2015, but expected government-security application demand to decline in the second half. It noted that small-business customer demand had not been consistently strong. The company planned to monitor orders and economic conditions, adjust staffing as needed, pursue lean manufacturing and cost improvements, and seek market-share gains and new products or markets. This is management’s outlook, not a quantified earnings forecast.
Management believed cash on hand, operating cash generation and access to external financing would meet liquidity needs for the next 12 months and five years. All $41.2 million of cash was held in the U.S.; capital-project purchase commitments were $1.6 million. The company paid a quarterly dividend of $0.05 per share. Management reported no material change in contractual obligations or risk factors, and no off-balance-sheet financing arrangements other than operating leases. It cautioned that actual results could differ due to demand, raw-material and other costs, competition, pricing, customer strategies, economic conditions, regulation, litigation, environmental matters and operational interruptions, among other risks.
The filing reports no material changes to market risks or critical accounting policies. CompX was evaluating the effect and adoption method for the new revenue-recognition standard, effective for the company beginning in Q1 2017. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether government-security demand weakens as anticipated in the second half of 2015, and the resulting effect on Security Products sales.
- Whether first-quarter sales gains and Marine Components’ improved margins persist.
- Whether seasonal working-capital outflows, particularly receivables and payment timing, reverse in subsequent quarters.
- Whether the $1.6 million of capital-project commitments and ongoing investment are funded as planned while maintaining cash and dividends.
- How adoption of the new revenue-recognition standard will affect reported results; the filing says the impact and adoption method had not yet been determined.