CompX International Inc. — Q2 2012 Form 10-Q
Business context and period: The filing reports unaudited results for the quarter and six months ended June 30, 2012, compared with the same 2011 periods. CompX makes security products, furniture components, and marine components. It is 87% owned by NL Industries. Dollar amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Q2 2012 | Q2 2011 | H1 2012 | H1 2011 |
|---|---|---|---|---|
| Net sales | $37.60 | $35.24 | $73.13 | $70.02 |
| Gross profit / margin | $10.03 / 27% | $9.84 / 28% | $19.50 / 27% | $18.52 / 26% |
| Operating income / margin | $3.93 / 10% | $3.14 / 9% | $6.84 / 9% | $11.90 / 17% |
| Net income | $2.09 | $1.63 | $3.62 | $5.62 |
| Basic and diluted EPS | $0.17 | $0.13 | $0.29 | $0.45 |
| Operating cash flow | Not presented by quarter | $1.56 | $2.83 |
- Q2 sales rose 7%; operating income rose 25% and net income rose 28%. Higher sales and the absence of 2011 facility-consolidation costs supported operating income, while gross margin declined one percentage point, primarily due to higher medical self-insurance costs.
- H1 sales increased 4%, but operating income fell 43% and net income fell 36%. The main comparison item was a $7.5 million patent-litigation settlement gain recorded in Q1 2011. H1 2011 also included $1.8 million of facility-consolidation costs and $0.2 million of litigation expense. Excluding those items, management said Furniture Components’ H1 operating margin improved by three percentage points year over year.
- H1 2012 income tax expense was $2.93 million versus $6.14 million in 2011; the prior-year tax provision included $2.1 million related to undistributed Canadian earnings associated with the settlement gain.
Segments and operating drivers
- Security Products: Sales increased 5% in Q2 and 3% in H1. Operating income declined 3% in both comparisons; higher medical self-insurance claims and, for H1, higher raw-material costs weighed on margins.
- Furniture Components: Sales rose 9% in Q2 and 5% in H1, including $1.1 million and $2.3 million, respectively, from the healthcare ergonomics product line acquired in July 2011. Q2 operating income benefited from the absence of prior-year consolidation costs. H1 operating income was affected by the prior-year settlement gain and consolidation items; weaker office-furniture project demand was partly offset by acquired-product sales.
- Marine Components: Sales increased 7% in both periods. The segment remained loss-making for H1, with an operating loss of $0.15 million, improved from $0.41 million a year earlier; Q2 operating income was $0.10 million.
Liquidity, debt, and capital allocation
- Cash was $5.18 million at June 30, 2012, down from $10.08 million at year-end 2011; $4.7 million was held by non-U.S. subsidiaries. Current assets were $46.32 million and current liabilities $17.43 million.
- Total debt was $22.93 million, including $21.0 million owed to an affiliate and $1.95 million drawn on a $30 million revolving facility. Debt declined from $24.19 million at year-end. The revolver matures in January 2015; the company reported covenant compliance and full availability of remaining capacity.
- H1 operating cash flow of $1.56 million was below capital expenditures of $2.16 million. Financing uses were $4.40 million, including $3.10 million of dividends ($0.25 per share) and $1.25 million of affiliate-note repayment. Cash declined by $4.90 million during the half-year.
- Capital-project purchase commitments were $1.2 million. Management stated that cash, operating cash flow, and access to external financing should cover liquidity needs for the next 12 months and five years, including capital expenditures, debt service, and dividends if declared.
Outlook, risks, and other notable matters
- No numerical earnings or sales guidance was provided. Management described demand as unstable: North American demand improved across many markets, but demand from significant office-furniture customers remained weak. The outlook for office-furniture sales, acquired-product demand, and growth across other customers was uncertain.
- Management cited commodity-cost volatility, especially steel, brass, alloyed zinc, and stainless steel, which together represented about 18% of cost of goods sold. Cost increases may be difficult to pass through or offset. Currency movements could also affect results; the company had $8.8 million of Canadian-dollar forward contracts maturing through December 2012, with an estimated $62,000 asset value.
- Other identified risks include economic and customer-demand changes, low-cost competition, pricing and product substitution, acquisition integration, litigation, tax matters, operational interruptions, environmental regulation, and compliance with debt covenants. The filing reported no material changes to previously disclosed risk factors or market risks.
- Potential acquisition-related contingent consideration ranges from zero to approximately $1.5 million, payable in Q1 2013 depending on 2012 sales targets; $0.73 million was accrued at June 30, 2012.
- Management stated disclosure controls were effective as of June 30, 2012 and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether office-furniture demand stabilizes and whether healthcare ergonomics product sales meet acquisition targets.
- Whether margins and operating cash flow improve as the prior-year litigation gain and facility-consolidation effects roll out of comparisons.
- Cash availability and location, affiliate-note terms, revolver capacity and covenants, and the company’s ability to maintain dividends.
- Exposure to raw-material costs, foreign exchange, and contingent acquisition consideration.
- Full-year results may differ from interim performance; the filing cautions that interim results may not indicate full-year operating results.