CompX International Inc. — Q1 2017 Form 10-Q
Business and period. CompX manufactures security products and recreational marine components. This report covers the three months ended March 31, 2017, compared with the prior-year quarter; the company notes its actual fiscal quarter ended April 2, 2017. CompX is 87% owned by NL Industries.
Key financial results
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q1 2016 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $27.075 | $29.948 | +10.6% |
| Gross profit / margin | $8.205 / 30.3% | $9.686 / 32.3% | +18.0% profit |
| Operating income / margin | $3.353 / 12.4% | $4.524 / 15.1% | +34.9% |
| Net income | $2.200 | $3.151 | +43.2% |
| Diluted EPS | $0.18 | $0.25 | +$0.07 |
| Operating cash flow | $(2.448) | $(0.210) | Cash use down $2.238 |
| Capital expenditures | $1.221 | $0.609 | Down $0.612 |
- Segment performance: Security Products sales rose 11% to $26.010 million and operating income rose 27% to $5.691 million. Higher government-customer volumes drove growth and improved manufacturing efficiency; this was partly offset by lower sales to a recreational-transportation OEM. Marine Components sales increased 8% to $3.938 million, with operating income of $0.371 million versus $0.334 million.
- Cash, liquidity and balance sheet: Cash was $30.113 million at March 31, down from $33.153 million at year-end. Current assets were $59.227 million and current liabilities $12.048 million (current ratio approximately 4.9). No debt is reported on the balance sheet. The company paid $0.05 per share in dividends. It reported $0.8 million of firm capital-project commitments.
- Cash flow and affiliate lending: Operating cash use reflected seasonal working-capital needs. Investing cash use was $2.209 million and included a net $1.6 million advance to Valhi under the affiliate note; the quarter included $14.1 million of advances and $12.5 million of collections. The Valhi note receivable was $29.0 million at quarter-end, bears interest at prime plus 1%, and is unsecured. Interest income, including commitment fees, was $0.3 million in Q1 2017 versus $0.032 million a year earlier.
Changes, outlook and risks
Management attributed the increase in sales and operating income primarily to stronger Security Products demand from existing government customers, with Marine Components also contributing. Gross margin improved by 2.0 percentage points, principally from higher Security Products production volumes and related manufacturing efficiencies. Selling, general and administrative expense was $5.162 million versus $4.852 million. The effective tax provision was $1.708 million versus $1.185 million.
Management expected government-security sales to moderate by midyear and full-year 2017 government volumes to be below 2016 levels. It anticipated continued transportation-market softness, while Security Products sales to other markets were expected to be at least comparable to the prior year. Management cited continued product innovation and diversification in Marine Components and plans to adjust staffing and pursue cost-improvement and market-expansion efforts as demand changes. It stated cash, operating cash flow and financing access should cover expected liquidity needs for the next 12 months and five years, while noting results below expectations could adversely affect liquidity. No numerical full-year earnings or revenue guidance was provided.
Risks identified include demand and customer concentration, raw-material and energy costs, competition from lower-cost sources, pricing and product substitution, litigation, environmental and regulatory matters, tax audits, operational interruptions and general economic conditions. Management reported no material change in risk factors, contractual obligations or market risks during the quarter. It also reported effective disclosure controls and no material change in internal control over financial reporting.
Accounting updates: CompX expected to adopt revenue-recognition Topic 606 in Q1 2018 using the modified retrospective approach and anticipated minimal revenue impact. It had not evaluated the lease standard’s effect but did not expect a material balance-sheet impact; it planned early adoption of the simplified goodwill-impairment standard for 2017 testing.
Investor verification points
- Assess the sustainability and timing of government-customer demand, given management’s expectation of lower full-year 2017 volumes, and monitor transportation-market weakness.
- Review the credit, collectability and terms of the $29.0 million unsecured related-party receivable from Valhi, including the company’s discretion to make further advances.
- Track seasonal working-capital movements and conversion of reported earnings into operating cash flow.
- Confirm the effect of raw-material costs, product mix and production volumes on gross margins, and monitor the expected accounting-standard adoptions.