CompX International Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are to December 31, 2012. CompX manufactures security products and recreational marine components. It sold its Furniture Components segment in December 2012, so the 2013 results reflect continuing operations; the 2012 income statement presents that segment as discontinued operations. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q1 2012 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $20.428 | $21.453 | +5% |
| Gross profit / margin | $6.012 / 29.4% | $6.020 / 28.1% | Margin down 1.3 percentage points |
| Operating income / margin | $1.583 / 7.7% | $1.434 / 6.7% | Down 9% |
| Income from continuing operations | $0.863 | $0.895 | +4% |
| Net income | $1.523 | $0.895 | Down 41%; 2012 included $0.660 from discontinued operations |
| Basic and diluted EPS | $0.12 total; $0.07 continuing | $0.07 | 2012 total included $0.05 from discontinued operations |
| Operating cash flow | $(2.862) | $(14.640) | Use increased $11.778 |
- Segments: Security Products sales rose 4% to $18.974 million, while operating income fell 8% to $3.193 million. Marine Components sales rose 11% to $2.479 million; its operating loss narrowed to $0.110 million from $0.250 million.
- Cash and liquidity: Cash was $50.064 million at quarter-end, down $13.713 million from year-end. Current assets were $76.618 million and current liabilities $9.339 million, implying working capital of $67.279 million and a current ratio of about 8.2x.
- Debt: Total note payable to affiliate was $18.230 million, including $1.000 million current maturities; the average interest rate was 1.3%. Q1 principal repayment was $0.250 million.
- Other cash flows: Investing activities provided $2.726 million, including $1.828 million collected on a note receivable and $1.559 million of proceeds from an asset sale. Financing activities used $1.799 million, including $1.549 million of dividends. Capital expenditures were $0.663 million.
Material changes and management commentary
- Sales growth reflected stronger postal-market demand in Security Products and marine market-share gains outside the high-performance boat market. Selling-price changes were not material.
- Higher self-insured medical costs—$0.315 million, including $0.260 million in cost of goods sold—pressured margins and Security Products operating results. Marine Components improved from increased sales and fixed-cost leverage.
- Operating cash use was materially affected by approximately $11.6 million of income-tax payments associated with the 2012 sale and the disposed business’s 2012 income. Management expected year-to-date operating cash flow to remain a net use in 2013, partly because 2012 cash-flow comparisons included the disposed operations.
- CompX received $1.8 million during Q1 from the sale of undeveloped Taiwan land; the remaining $1.2 million was received in April 2013. It also completed the sale of a facility for net proceeds of approximately $1.6 million, near carrying value.
- Management said customer demand remained unstable and could not determine whether total sales would continue growing through the rest of 2013. It emphasized lean manufacturing, cost improvement, aligning staffing with demand, market-share gains, new markets and product development. No numerical earnings or sales guidance was provided.
- Zinc, brass and stainless steel together represented about 10% of cost of goods sold. Management warned that competitive conditions may limit its ability to pass commodity-cost increases to customers; margins could be affected if cost reductions do not offset them.
- Management believed cash on hand, operating cash flow and access to external financing would meet liquidity needs for the next 12 months and five years, while cautioning that weaker-than-expected results could adversely affect liquidity.
Risks, contingencies and controls
The filing reported no material changes in contractual obligations or risk factors since the 2012 Form 10-K. Disclosed risks include demand volatility, raw-material and other cost changes, low-cost competition, pricing and product decisions, regulation, environmental matters, tax audits, litigation, operating disruptions and general economic conditions. The filing reported no material change in market risks, no material change to internal control over financial reporting, and effective disclosure controls and procedures as of March 31, 2013.
Investor facts to verify
- Whether sales growth persists amid management’s uncertainty about customer demand.
- Whether medical-cost pressures and commodity inflation continue to affect gross and operating margins, and whether cost actions or pricing can offset them.
- How operating cash flow normalizes after the sale-related tax payment and the removal of disposed operations from comparisons.
- Cash receipts and completion of the Taiwan land sale, including the $1.2 million received in April 2013, and the use of proceeds.
- Debt repayment, affiliate-related balances and dividend sustainability relative to ongoing cash generation.
- Potential outcomes of tax matters, litigation, environmental obligations and other risks referenced in the filing and prior annual report.