CompX International Inc. — 2019 Form 10-K Summary
Business context and reporting period
CompX manufactures security products and recreational marine components through its Security Products and Marine Components segments. This annual report covers fiscal 2019, a 52-week year that actually ended December 29, 2019; figures are presented as of or for the year ended December 31. The company is 86% owned by NL Industries.
Key financial metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Net sales | $124.2 million | $118.2 million |
| Gross margin | $39.0 million; 31.4% | $38.3 million; 32.4% |
| Operating income | $17.7 million; 14.2% | $17.8 million; 15.1% |
| Interest income | $3.3 million | $2.7 million |
| Net income | $16.0 million | $15.3 million |
| Diluted earnings per share | $1.29 | $1.23 |
| Operating cash flow | $18.5 million | $17.2 million |
| Capital expenditures | $3.2 million | $3.1 million |
| Cash and cash equivalents at year-end | $63.3 million | $45.4 million |
| Current liabilities at year-end | $13.1 million | $13.7 million |
CompX reported no company borrowings in the supplied balance sheet and stated that it had no off-balance-sheet financing arrangements. Stockholders’ equity was $162.2 million. Cash dividends paid were $3.5 million, or $0.28 per share, compared with $2.5 million, or $0.20 per share, in 2018. The board declared a $0.10-per-share first-quarter 2020 dividend after year-end; future dividends remain discretionary.
Quarterly 2019 results: fourth-quarter sales were $29.6 million, operating income $3.5 million, net income $3.2 million and diluted EPS $0.26. In fourth-quarter 2018, the respective figures were $27.4 million, $2.9 million, $2.7 million and $0.22.
Material changes versus the prior comparable period
- Annual sales rose 5%, mainly from higher Marine Components sales to the towboat market. Marine Components revenue grew 26% to $24.9 million; operating income increased 33% to $3.6 million.
- Security Products sales rose 1% to $99.3 million, but segment operating income fell 4% to $21.0 million. Management cited higher skilled-labor costs, partly offset by lower medical costs.
- Consolidated gross margin dollars increased 2%, but gross margin percentage declined one percentage point to 31.4%, reflecting lower Security Products margins. Operating income was nearly flat, down 1%.
- Net income increased 4%, supported in part by higher interest income on the affiliate loan and cash investments, as well as a lower effective tax rate.
- Cash from operations increased $1.3 million. Year-end cash rose $17.8 million; investing cash flow was positive $2.9 million, principally reflecting net collections on the affiliate note.
Outlook, risks and unusual items
- Management expected Marine Components growth to normalize in 2020 after a strong 2019, while Security Products could face headwinds that emerged late in 2019. The company planned to pursue market share, new markets, product development and cost improvements; it did not provide numerical earnings or sales guidance.
- Management estimated 2020 capital expenditures at approximately $4.0 million, expected to be funded from cash and operating cash flow. It believed available cash and operating cash flow would meet near-term liquidity needs and obligations over the next five years, subject to actual results and developments.
- Raw materials represented about 45% of cost of sales, with commodity-related materials about 13%. Management expected key commodity markets to remain stable in 2020 but warned that economic conditions could renew price volatility; the company does not hedge commodity costs.
- Customer concentration is notable: the U.S. Postal Service represented 14% of 2019 sales, and the ten largest customers accounted for 47%. Competition, demand changes, skilled-labor costs, supply interruptions, cyber incidents, environmental regulation and public-health crises were identified risks.
- Related-party exposure: CompX’s unsecured revolving demand note to Valhi carries interest at prime plus 1%. The balance-sheet note receivable was $28.1 million at CompX’s December 29 fiscal year-end. The filing separately states that a $5.7 million advance on December 31 raised the balance to $33.8 million at Valhi’s year-end. Principal is due on demand, but not before December 31, 2021. This is a significant concentration of cash and related-party credit risk.
- CompX is part of the Contran consolidated tax group and is jointly and severally liable for group federal taxes for periods of membership; NL has agreed to indemnify CompX for amounts above its allocated tax liability. Management did not expect pending legal, environmental or tax matters to have a material adverse effect.
- The 2017 tax-law change produced a $1.9 million non-cash deferred tax benefit in 2017, affecting comparisons. The 2019 tax provision also included a $0.2 million current tax benefit from the foreign-derived intangible income deduction.
Important facts for investors to verify
- Review the terms, collectability and related-party governance of the Valhi note, including the different December 29 and December 31 balances disclosed.
- Assess whether Marine Components can sustain profitable growth as management expects growth to normalize, and monitor Security Products demand and labor costs.
- Track gross-margin trends, customer concentration and the ability to pass through material-cost increases.
- Confirm subsequent dividend decisions and capital spending against cash generation and liquidity needs.
- Consider the company’s controlling ownership, shared services and insurance arrangements, and consolidated tax-group exposure when evaluating governance and risk.