CompX International Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014; financial statements are unaudited. CompX manufactures security products and recreational marine components. It is 87% owned by NL Industries.
Financial results
Amounts are in millions of dollars except per-share data and margins. Comparisons are with the same periods in 2013.
| Metric | Q3 2013 | Q3 2014 | Nine months 2013 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $24.2 | $26.5 | $69.7 | $79.1 |
| Gross profit | $7.5 | $8.1 | $21.1 | $24.5 |
| Gross margin | 31.0% | 30.8% | 30.3% | 31.0% |
| Operating income | $3.0 | $3.4 | $7.4 | $10.6 |
| Operating margin | 12.3% | 13.0% | 10.6% | 13.4% |
| Net income | $2.0 | $2.2 | $4.7 | $6.9 |
| Diluted earnings per share | $0.16 | $0.18 | $0.38 | $0.56 |
Segments: Q3 Security Products sales were $23.2 million, up 8%, and Marine Components sales were $3.2 million, up 18%. Nine-month sales were $69.2 million (up 13%) and $9.9 million (up 17%), respectively. Nine-month segment operating income was $14.2 million for Security Products and $0.7 million for Marine Components.
Cash flow: Operating activities generated $7.2 million in the first nine months of 2014, versus $7.9 million used in the prior-year period. The $15.1 million improvement primarily reflected lower tax payments, higher operating income and more favorable working-capital changes. Investing activities used $2.2 million, including $2.2 million of capital expenditures. Financing activities used $1.9 million, all dividends; the prior-year period included $18.5 million of debt repayment.
Liquidity and debt: September 30 cash was $41.9 million, up from $38.8 million at year-end 2013. Current assets were $71.6 million and current liabilities $12.6 million. The filing reports no long-term debt at September 30; the remaining long-term debt had been repaid in 2013. Dividends were $0.05 per share in Q3 and $0.15 per share for the nine months, compared with $0.05 and $0.225, respectively, in 2013.
Changes and management commentary
- Q3 sales rose approximately 9% and operating income 15%; nine-month sales rose approximately 13% and operating income 45%. Nine-month net income increased from $4.7 million to $6.9 million.
- Management attributed growth principally to higher Security Products demand, including new products for an existing government customer, transportation demand and electronic-lock market penetration. Marine Components benefited from gains in ski/wakeboard and other non-high-performance markets.
- Q3 gross margin was broadly stable: increased production improved fixed-cost absorption, offset by less favorable Security Products customer and product mix. Nine-month gross margin improved as higher volumes increased fixed-cost absorption.
- Management expected seasonal demand to ease in Q4 but anticipated continued strong demand from large government and commercial customers. No quantified earnings or revenue guidance was provided.
- Management said cash and operating cash flows, together with access to external financing, were expected to meet working-capital, capital expenditure, debt-service and dividend needs for the next 12 months and five years. Capital-project purchase commitments were $508,000.
Risks, contingencies and unusual items
- Commodity-price volatility—principally zinc, brass and stainless steel, about 11% of cost of goods sold—could pressure margins; passing cost increases to customers may be difficult.
- Other cited risks include product demand, competition, customer and product mix, new-product development, economic conditions, operating interruptions, environmental and regulatory matters, and tax uncertainties. The company reported no material change in its risk factors or contractual obligations from its 2013 Annual Report.
- Internal controls: Management concluded disclosure controls were not effective as of September 30 because of a material weakness related to monitoring user access and segregation of duties in a new ERP system implemented in Q1 2014. Additional controls were implemented after June 30, but effectiveness testing was still underway and expected to finish in Q4; remediation had not yet been concluded.
- The company was evaluating the effect and adoption method for the new revenue-recognition standard, effective for it beginning in Q1 2017.
- CompX is controlled through a multi-tier ownership structure involving NL Industries, Valhi and Contran; related-party governance and control are relevant context.
Key facts for investors to verify
- Whether ERP access-control remediation testing was completed successfully and the material weakness formally remediated.
- Whether government and commercial customer demand remained strong after seasonal demand eased, and whether customer concentration or product mix affected margins.
- Whether commodity-cost increases were offset through efficiencies or pricing, and how inventory and receivables developed after quarter-end.
- Whether cash generation, capital spending, and the $0.05 quarterly dividend remained sustainable; the filing provides no quantified forward earnings guidance.
- Any subsequent developments in tax matters, contractual commitments, or the adoption assessment for the new revenue standard.