CompX International Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; financial statements are unaudited. CompX manufactures security products, furniture components and marine components. NL Industries owned approximately 87% of CompX at quarter-end.
Financial performance
Amounts are in millions of dollars except per-share data. Comparisons are with Q1 2011 unless otherwise stated.
| Metric | Q1 2012 | Q1 2011 | Change / context |
|---|---|---|---|
| Net sales | $35.531 | $34.777 | Up 2% |
| Gross profit / margin | $9.474 / 26.7% | $8.681 / 25.0% | Improved, primarily from manufacturing efficiencies |
| Operating income / margin | $2.909 / 8.2% | $8.760 / 25.2% | Lower largely because Q1 2011 included a $7.468 litigation settlement gain |
| Net income | $1.523 | $3.991 | Down; Q1 2011 also included related litigation and facility consolidation items |
| Basic and diluted EPS | $0.12 | $0.32 | Declined |
| Operating cash flow | $(2.862) | $0.145 | Declined, including working-capital cash outflows |
| Capital expenditures | $0.600 | $0.575 | |
| Cash and cash equivalents | $4.155 at March 31 | $10.081 at December 31, 2011 | Substantially all quarter-end cash was held by non-U.S. subsidiaries |
| Total debt | $23.233 at March 31 | $24.185 at December 31, 2011 | Includes $21.230 owed under an affiliate note and $2.003 under the revolver |
The quarterly dividend remained $0.125 per share. Interest expense was $0.162 million, and income tax expense was $1.229 million.
Segments and material changes
- Security Products: Sales rose 2% to $18.195 million; operating income declined 3% to $3.471 million, with lower gross margin attributed to somewhat higher raw-material costs and less favorable product mix.
- Furniture Components: Sales rose 1% to $15.103 million, including $1.1 million from a business acquired in July 2011. Operating income was $1.325 million versus $6.874 million in Q1 2011; the prior period included the $7.5 million litigation settlement gain, litigation expense and facility consolidation costs. Excluding those items, management said operating income as a percentage of sales improved by four percentage points, principally due to manufacturing efficiencies.
- Marine Components: Sales rose 7% to $2.233 million. The operating loss narrowed to $0.250 million from $0.355 million.
Consolidated sales increased modestly, while gross margin improved. The sharp year-over-year decline in operating income and earnings principally reflects the nonrecurring Q1 2011 settlement gain; Q1 2011 also included approximately $1.0 million of facility consolidation costs.
Liquidity, outlook and risks
- CompX repaid $1.0 million of affiliate-note principal in Q1. Approximately $2.0 million was outstanding on a $30 million revolving facility maturing in January 2015; the company said it could borrow the remaining capacity without violating covenants and was in compliance with financial covenants at March 31.
- Management believed cash, operating cash flow and access to external financing would meet working-capital, capital-expenditure, debt-service and dividend needs over the next 12 months and five years. This assessment is subject to actual results and other developments.
- No quantified earnings or revenue guidance was provided. Management described demand as uncertain: office-furniture customers remained weak, while demand across most markets had improved modestly. Staffing adjustments, cost initiatives, market expansion and product development were identified as areas of focus.
- Commodity raw materials represented approximately 18% of cost of goods sold. Management said their overall cost change was not significant in Q1, but warned that future increases may be difficult to pass through or offset. Currency movements could also affect results; CompX used Canadian-dollar forward contracts with $13.3 million aggregate notional amount, maturing through December 2012, and an estimated $0.315 million asset fair value at quarter-end.
- Other cited risks include office-furniture demand, competition and pricing, acquisition integration and demand for acquired products, litigation, foreign exchange, tax matters, environmental and regulatory requirements, operational interruptions, and revolver covenants. The filing reported no material changes in risk factors or contractual obligations from the 2011 Annual Report.
- Quarter-end firm commitments for capital projects were $0.910 million. The filing reported no material changes to internal control over financial reporting and concluded disclosure controls were effective.
Investor verification priorities
- Separate the recurring operating trend from the Q1 2011 litigation settlement and consolidation items when assessing year-over-year earnings.
- Track whether office-furniture demand and sales from the acquired ergonomics healthcare business develop as management expects.
- Monitor operating cash conversion, the decline in cash balances, and the location and accessibility of cash held by non-U.S. subsidiaries.
- Verify debt repayment, affiliate-note terms, revolver availability and covenant compliance in subsequent filings.
- Assess exposure to raw-material cost pressure and foreign-exchange movements, including the effect and maturity of hedging contracts.