CompX International Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; financial amounts below are in U.S. dollars. CompX manufactures security products and recreational marine components and is 87% owned by NL Industries.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $28.413 million | $29.948 million | Down 5% |
| Gross profit | $9.503 million | $9.686 million | Down 2% |
| Gross margin | 33.4% | 32.3% | Up 1.1 percentage points |
| Operating income | $4.373 million | $4.524 million | Down 3% |
| Operating margin | 15.4% | 15.1% | Up 0.3 percentage points |
| Net income | $3.726 million | $3.151 million | Up 18% |
| Diluted earnings per share | $0.30 | $0.25 | Up $0.05 |
Security Products sales fell 8% to $24.056 million, primarily from lower sales to government security customers and a recreational transportation customer. Marine Components sales rose 11% to $4.357 million on generally improved demand. Gross margin improvement reflected lower Security Products fixed costs following 2017 headcount reductions and better Marine manufacturing efficiency and fixed-cost leverage. Corporate operating expenses increased to $1.825 million from $1.538 million.
Cash flow, liquidity and balance sheet
- Operating cash flow was a use of $237,000, compared with a use of $210,000 in Q1 2017; management attributed the seasonal use to working-capital movements.
- Investing cash use was $444,000, including $644,000 of capital expenditures. Valhi made $12.6 million in repayments and $12.4 million in advances under its note, reducing the receivable by a net $200,000.
- Cash declined $1.302 million during the quarter to $28.353 million. CompX paid $621,000 in dividends, or $0.05 per share.
- At March 31, cash was $28.353 million, current assets were $58.093 million, and current liabilities were $9.353 million. Total stockholders’ equity was $139.690 million. The balance sheet presents no borrowings or debt line item; deferred income taxes were $3.268 million.
- A $38.0 million unsecured note receivable from affiliate Valhi is a significant asset. It bears interest at prime plus 1%, is payable on demand but not before December 31, 2019, and is within a $40 million lending commitment. Q1 interest income from the note, including commitment fees, was $0.5 million.
Outlook, risks and notable items
- Management expected full-year 2018 consolidated sales to meet or exceed 2017, supported by growth in other Security Products markets and continued Marine Components growth. It expected government-customer security sales to be comparable with 2017, while transportation sales were expected to remain soft.
- Management cited demand, raw-material and operating costs, competition, customer and competitor strategies, product development, litigation, regulation, taxes, economic conditions, and operating disruptions among risks that could affect results.
- The company adopted ASC 606 revenue recognition on January 1, 2018 using the modified retrospective method; management reported no material adoption impact and expected minimal ongoing effect. The 2017 Tax Act reduced the federal corporate tax rate to 21%; the company had recorded a $1.9 million deferred tax benefit in 2017 and had not made further provisional-measurement adjustments in Q1.
- Management said liquidity from operations, cash on hand and potential external financing should meet needs for the next 12 months and five years. Capital-project purchase commitments were $0.6 million. No material changes to contractual obligations or risk factors were reported. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether the projected full-year sales growth materializes despite lower Security Products and transportation demand.
- The credit quality and terms of the $38.0 million related-party Valhi receivable, including CompX’s exposure to affiliate concentration.
- Whether inventory and receivables convert to cash: accounts receivable rose to $12.673 million and inventory to $16.328 million from year-end; Security Products work-in-process increased about $0.7 million for anticipated second-quarter demand.
- How raw-material costs, production volumes, customer mix and fixed-cost leverage affect margins and cash flow.
- Any subsequent adjustments to the provisional tax accounting before the measurement period ends December 22, 2018.