CompX International Inc. — Q2 2018 Form 10-Q
Business and period: CompX manufactures security products, including locks, and recreational marine components. This report covers the quarter and six months ended June 30, 2018; the company notes its actual quarterly period ended July 1, 2018. Results are unaudited.
Financial results
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Net sales | $32.4m | $30.0m | $60.8m | $60.0m |
| Gross profit | $11.2m | $9.5m | $20.7m | $19.2m |
| Gross margin | 34.7% | 31.7% | 34.1% | 32.0% |
| Operating income | $6.0m | $4.6m | $10.4m | $9.1m |
| Operating margin | 18.5% | 15.3% | 17.0% | 15.2% |
| Net income | $5.0m | $3.3m | $8.7m | $6.5m |
| Diluted EPS | $0.40 | $0.27 | $0.70 | $0.52 |
- Cash flow and liquidity: First-half operating cash flow was $6.1m, compared with $4.3m a year earlier. Capital expenditures were $1.4m; dividends paid were $1.2m. Cash rose to $33.7m from $29.7m at year-end 2017. Current assets were $64.9m and current liabilities $11.1m.
- Debt and affiliate note: No debt is reported on the balance sheet. CompX held a $37.6m unsecured demand note receivable from Valhi, bearing interest at prime plus 1%; principal was due on demand but not before December 31, 2019. First-half interest income on the note, including commitment fees, was $1.0m.
- Other balance-sheet items: Total assets were $158.5m and stockholders’ equity $144.2m at June 30, 2018. First-half cash paid for income taxes was $2.0m.
Changes and drivers
- Q2 sales increased 8% year over year; first-half sales increased 1%. Q2 growth reflected higher sales across most Security Products markets and continued Marine Components growth. First-half Marine growth was partly offset by lower sales to existing government security customers and a recreational-transportation customer.
- Q2 Security Products sales rose 5%, while Marine Components sales rose 30%. For the first half, Security Products sales fell 1% and Marine Components sales rose 20%.
- Operating income rose 30% in Q2 and 13% for the first half. Management cited favorable customer and product mix, improved manufacturing efficiencies and production volumes, lower production costs, and stronger Marine Components demand. First-half corporate operating expenses increased to $3.6m from $2.8m.
- The effective U.S. federal corporate tax rate fell from 35% to 21% in 2018 under the Tax Cuts and Jobs Act. First-half tax expense was $2.8m versus $3.5m; the filing says no further measurement-period adjustment to the provisional 2017 tax-law accounting was recorded in the first half.
Outlook, risks and notable items
- Management expected full-year 2018 consolidated sales to meet or exceed 2017 sales, citing anticipated sales in other Security Products markets and continued Marine Components growth. This is a sales outlook; the filing provides no numerical earnings or cash-flow guidance.
- Risks cited include product demand, raw-material and operating costs, competition, pricing and product mix, customer strategies, product development, litigation, environmental and tax matters, regulation, economic conditions, and operating disruptions. Management reported no material changes to previously disclosed risk factors or market risks.
- Management believed cash, operating cash flow and access to external financing would meet liquidity needs for the next 12 months and five years. Capital project purchase commitments were $0.3m. The company reported no material changes in contractual obligations and no off-balance-sheet financing arrangements other than operating leases.
- Effective July 17, 2018, NL converted its 10m Class B shares into Class A shares, eliminating the dual-class director-election voting structure. The filing states this did not affect earnings per share, financial position, results or liquidity.
- CompX adopted revenue-recognition Topic 606 on January 1, 2018; management said adoption had no material financial-statement impact. It expected lease standard Topic 842 adoption in 2019 to have no material balance-sheet effect, given $0.4m of future minimum operating-lease payments at year-end 2017.
Investor verification points
- Track the $37.6m Valhi receivable, its credit exposure, repayment terms and interest income; it is a substantial related-party asset.
- Assess whether the stated full-year sales outlook is being achieved, particularly given first-half weakness in Security Products sales to certain customers.
- Monitor segment margins and whether manufacturing efficiencies, mix benefits and Marine Components growth continue.
- Verify completion of the Tax Cuts and Jobs Act accounting measurement period by December 22, 2018, and review any resulting adjustment.
- Review subsequent filings for material changes in demand, input costs, liquidity, capital spending, or the risks referenced in this report.