CompX International Inc. — Q1 2022 Form 10-Q
Business and period: CompX manufactures security products and marine components. This report covers the three months ended March 31, 2022; the company notes its actual quarterly period ended April 3, 2022. Comparisons are with the corresponding 2021 period unless stated otherwise. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2021 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $35.9 million | $42.1 million | +17.1% |
| Gross margin | $11.0 million; 30.7% | $12.1 million; 28.7% | Margin down 2.0 percentage points |
| Operating income | $5.8 million; 16.2% | $6.3 million; 15.0% | +8.4%; margin down 1.2 points |
| Net income | $4.7 million | $5.0 million | +6.4% |
| Diluted earnings per share | $0.38 | $0.40 | +5.3% |
| Cash from operating activities | $(2.4) million | $(2.2) million | Cash use decreased $0.2 million |
At March 31, 2022, cash and cash equivalents were $70.2 million, versus $76.6 million at December 31, 2021. Current assets were $119.5 million and current liabilities $14.2 million. The balance sheet lists no debt; deferred income taxes were $2.7 million. Net property and equipment was $29.9 million. Capital expenditures were $1.7 million in Q1 2022, compared with $0.6 million in Q1 2021.
Segment results
- Security Products: Sales increased 14% to $29.6 million; operating income rose 9% to $6.0 million. Gross margin declined to 30.7% from 31.8%, and operating margin to 20.3% from 21.2%.
- Marine Components: Sales increased 24% to $12.5 million; operating income rose 3% to $2.0 million. Gross margin declined to 24.1% from 27.9%, and operating margin to 16.1% from 19.4%.
Material changes and management commentary
Management attributed higher sales to growth across Security Products markets and stronger Marine Components sales, primarily to towboat customers and boat manufacturers. Higher raw-material, shipping and labor costs more than offset some fixed-cost benefits from increased production, reducing gross and operating margins. SG&A increased with salary and benefit costs, advertising, travel, IT and recruiting expenses, although it declined as a percentage of sales.
Operating cash use is typical for the first quarter due to seasonal working-capital movements. Cash flow also reflected increased inventories, receivables, prepaids and capital spending. The company paid $3.1 million in dividends in Q1 2022, up from $2.5 million a year earlier; the regular quarterly dividend increased from $0.20 to $0.25 per share. It made no share repurchases in Q1 2022. The company had 602,547 shares available under its repurchase authorization.
Outlook, risks and other items
Management reported strong demand and elevated production rates and expected demand to remain strong, with higher 2022 net sales and operating income than in 2021. It cautioned that labor shortages, especially in Marine Components, and supply-chain delays and shortages remain challenges. Higher wages, overtime, shipping and raw-material costs are expected to continue pressuring gross margins in 2022. Price increases and surcharges have been implemented, but their ability to offset rising costs is uncertain.
Identified risks include changes in product demand, raw-material and other operating costs, competition, supply-chain and transportation disruptions, labor constraints, global economic and political conditions, COVID-19 impacts, operating interruptions, litigation, environmental matters and tax uncertainties. Management said liquidity from operating cash flows, cash on hand and access to external financing should be sufficient for anticipated needs over the next 12 months and five years. Capital-project purchase commitments were $0.6 million at quarter-end.
CompX had an $18.1 million unsecured demand-note receivable from affiliate Valhi at March 31, 2022, under a facility allowing loans up to $30 million. The note bears interest at prime plus 1.00%; further advances are at CompX’s discretion. Management notes that affiliate loans may carry greater credit risk than cash-equivalent investments. The company is approximately 87% owned by NL Industries. No material changes in contractual obligations or market risks were reported; disclosure controls were assessed as effective, with no material change in internal control over financial reporting.
Investor verification points
- Track whether sales growth continues to translate into operating income as input, freight and labor costs pressure margins.
- Verify the pace and effectiveness of price increases and surcharges relative to cost inflation.
- Monitor staffing, supplier lead times, material availability and production capacity, particularly in Marine Components.
- Assess seasonal working-capital needs, capital spending and cash generation against the company’s dividend policy.
- Review the credit and liquidity exposure from the Valhi affiliate note, including its balance, terms and any additional advances.
- Confirm the 2022 outlook against subsequent filings; management’s forecast is subject to demand, supply-chain and other uncertainties.