CompX International Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019 (the company notes its actual fiscal quarter ended September 29). CompX manufactures security products and recreational marine components. It is 86% owned by NL Industries.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $29.7m | $30.0m | $94.6m | $90.8m |
| Gross margin | $9.5m (31.9%) | $9.6m (31.9%) | $30.0m (31.8%) | $30.3m (33.4%) |
| Operating income | $4.3m (14.4%) | $4.5m (15.1%) | $14.2m (15.0%) | $14.9m (16.4%) |
| Net income | $3.9m | $3.9m | $12.8m | $12.7m |
| Diluted EPS | $0.31 | $0.32 | $1.03 | $1.02 |
All figures are in U.S. dollars; amounts are rounded. Nine-month operating cash flow was $12.5m, versus $12.8m a year earlier. Capital expenditures were $2.5m. Cash increased to $50.2m at September 30 from $45.4m at year-end 2018. The balance sheet reports no debt line; current liabilities were $13.1m and stockholders’ equity was $159.8m. The filing does not provide a separate debt or credit-facility balance.
Business and period comparisons
- Q3 sales declined 1% year over year; nine-month sales rose 4%. Q3 weakness in Security Products more than offset Marine Components growth.
- Security Products sales were $23.4m in Q3, down 5%; nine-month sales of $75.0m were roughly flat. Segment operating income fell 9% in Q3 and 10% year to date, reflecting lower volumes, higher labor and payroll costs, and reduced fixed-cost absorption.
- Marine Components sales increased 15% in Q3 to $6.3m and 31% year to date to $19.6m, mainly from towboat-market demand, including wake-enhancement systems and surf pipes. Segment operating income rose 28% in Q3 and 38% year to date.
- Nine-month gross margin percentage fell to 31.8% from 33.4%, principally due to lower Security Products margins. Q3 gross margin percentage was unchanged at 31.9%.
Liquidity, outlook, risks, and other items
- Management expects full-year sales to exceed 2018 absent further economic slowdown. It gave no specific earnings or margin guidance. Marine Components’ sales growth moderated in Q3, while Security Products faced weakening conditions among customers and markets.
- Management cited higher Security Products labor costs that could not be offset by price increases, and tariff and trade concerns that may affect major OEM customers. It plans to monitor orders and adjust staffing and discretionary spending while pursuing cost improvements and market expansion.
- Liquidity is supported by cash and operating cash flow; management believes available resources and external financing capacity will cover expected needs for the next 12 months and five years. This assessment depends on actual results and other developments.
- Related-party exposure is significant: CompX held a $36.7m unsecured demand note receivable from Valhi at September 30, bearing prime plus 1% (6.0% then), with principal due on demand but not before December 31, 2020. The note had a $40m limit. The filing also describes a $3.3m loan made to Valhi on September 30 after CompX’s fiscal quarter-end, which raised the receivable to $40m.
- The quarterly dividend increased from $0.05 to $0.07 per share beginning in Q1 2019; future dividends remain at the board’s discretion. Nine-month dividends paid were $2.6m.
- No material changes to previously reported contractual obligations or risk factors were identified. The company reported no material market-risk changes, and disclosure controls were deemed effective. Adoption of lease accounting guidance had no material financial-statement effect.
Important facts for investors to verify
- Whether Security Products demand and margins stabilize, particularly given labor-cost pressure and customer-market weakness.
- Whether Marine Components’ elevated growth and improved operating leverage persist as growth moderates.
- Valhi’s ability to repay the unsecured related-party note, and the implications of the post-quarter-end advance and affiliate concentration.
- Working-capital trends: inventories rose to $18.8m, and consolidated days in inventory increased to 85 from 80 at year-end 2018.
- Future dividend decisions and the company’s liquidity if operating conditions weaken further.