CompX International Inc. — Q2 2015 Form 10-Q
Business context and reporting period. CompX manufactures security products, including mechanical and electronic locks, and recreational marine components. This unaudited report covers the three and six months ended June 30, 2015; comparisons are with the corresponding 2014 periods. CompX is approximately 87% owned by NL Industries.
Financial performance
Amounts below are in millions of dollars unless noted otherwise.
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $28.918 | $26.848 | $56.808 | $52.629 |
| Gross profit | $9.160 | $8.613 | $17.726 | $16.362 |
| Operating income | $4.306 | $3.912 | $8.007 | $7.200 |
| Net income | $2.810 | $2.556 | $5.224 | $4.696 |
| Diluted EPS | $0.23 | $0.21 | $0.42 | $0.38 |
| Gross margin | 31.7% | 32.1% | 31.2% | 31.1% |
| Operating margin | 14.9% | 14.6% | 14.1% | 13.7% |
Cash flow and liquidity. First-half operating cash flow was $0.588 million, versus $1.702 million in 2014. Capital expenditures were $1.913 million and dividends paid were $1.240 million; cash declined $2.565 million from the start of 2015 to $43.005 million at June 30. Current assets were $75.292 million and current liabilities $10.490 million. The balance sheet reports no debt; interest income was $16,000 for the first half. Management said cash, operating cash flow, and access to external financing should meet anticipated needs for working capital, capital spending, debt service, and dividends over the next 12 months and five years.
Material changes and operating drivers
- Sales increased about 8% in both Q2 and the first half. Management attributed most of the growth to higher demand from existing government customers in Security Products, including $2.0 million of additional Q2 sales and $3.2 million for the first half. Office equipment and institutional furniture contributed to first-half growth; Marine Components benefited from demand in the waterski/wakeboard boat market.
- Security Products first-half sales rose 8% to $49.716 million and operating income rose 7% to $10.200 million. Q2 gross margin declined to 32.1% from 32.9%, primarily due to customer and product mix and lower variable margins.
- Marine Components first-half sales rose 7% to $7.092 million and operating income increased to $0.866 million from $0.505 million, reflecting improved demand, manufacturing efficiencies, and fixed-cost leverage.
- Consolidated Q2 gross margin eased to 31.7% from 32.1%; first-half gross margin was broadly stable. Operating income grew faster than sales in both comparative periods.
- Accounts receivable rose to $13.073 million from $8.747 million at year-end, while inventory declined to $16.118 million from $16.863 million. Management said days sales outstanding were in line with expectations and inventory days fell partly after planned year-end inventory builds.
Outlook, risks, and other notable items
- Management anticipated continued strong demand during 2015 but cautioned that government-security demand could decrease in the second half. It reported no broad-based demand increase across other markets or small-business customers. No numerical earnings or sales guidance was provided.
- Risks identified include customer demand, raw-material and energy costs and the ability to pass them through, low-cost competition, product and customer mix, new-product development, economic conditions, operating interruptions, litigation, environmental matters, and tax outcomes. The filing reported no material changes to previously disclosed risk factors.
- Cash dividends were $0.05 per share each quarter. Capital-project purchase commitments were $1.1 million at June 30. The filing reported no material changes in contractual obligations; further details are in the 2014 Form 10-K. It also reported no off-balance-sheet financing arrangements other than operating leases.
- CompX terminated its discretionary revolving loan facility with NL in June 2015; the filing says no loans had been made under it since before 2014. A related-party transaction policy was adopted, and the audit committee reviewed or ratified specified ordinary-course arrangements, including group insurance and tax sharing.
- CompX was evaluating the effect and adoption method for the new revenue-recognition standard. The filing described adoption as expected in 2017, potentially deferred to 2018 if the proposed deferral were issued.
Important facts for investors to verify
- Whether government-security customer demand remains strong, and the extent and timing of any second-half decline.
- Whether increased receivables and weak first-half operating cash conversion reflect timing or a persistent working-capital trend.
- Whether Security Products’ mix-related margin pressure continues, and whether Marine Components’ margin improvement is sustainable.
- How the $1.1 million of capital-project commitments, ongoing capital spending, and dividends affect cash levels.
- Details of contractual obligations, operating leases, contingencies, and related-party arrangements referenced in the 2014 Form 10-K and proxy statement; the filing text does not provide a complete breakdown.