CompX International Inc. — Q3 2012 Form 10-Q
Business context and period. This unaudited report covers the three and nine months ended September 30, 2012, compared with the corresponding 2011 periods. CompX manufactures security products, furniture components, and marine components. It is 87% owned by NL Industries. Results for the interim periods may not indicate full-year performance.
Financial performance
- Third quarter: Net sales were $37.1 million, up 4% year over year. Gross profit was $10.2 million, with gross margin rising to 27% from 24%. Operating income increased to $4.3 million from $1.5 million; operating margin was 12% versus 4%. Net income was $2.6 million ($0.21 per share), compared with $1.1 million ($0.09 per share).
- First nine months: Net sales were $110.2 million, up 4%. Gross profit was $29.7 million, and gross margin improved to 27% from 26%. Operating income declined to $11.2 million from $13.4 million; operating margin was 10% versus 13%. Net income was $6.2 million ($0.50 per share), compared with $6.7 million ($0.54 per share).
- Cash flow: Operating cash flow for the first nine months was $6.4 million, down from $8.3 million. Capital expenditures were $3.1 million, and cash used in investing activities was $3.1 million. Dividends paid were $4.6 million. Cash decreased from $10.1 million at year-end 2011 to $7.0 million at September 30, 2012.
- Liquidity and debt: Current assets were $48.5 million and current liabilities $17.1 million. Total debt was $22.5 million, including $2.0 million drawn on a $30 million revolving facility and $20.5 million owed under an affiliate promissory note. The company reported covenant compliance and access to remaining facility capacity. Of cash on hand, $6.0 million was held by non-U.S. subsidiaries.
Changes, drivers, and unusual items
- Q3 sales growth reflected increased demand across most segments, including acquired healthcare ergonomics products, and improved North American conditions. For the first nine months, acquired-product sales contributed about $2.7 million.
- Furniture Components’ Q3 operating income improved substantially, supported by product mix, production efficiencies after facility consolidation, lower steel costs, and a $778,000 reversal of contingent acquisition consideration. Its nine-month operating income fell to $5.8 million from $8.4 million, in part because 2011 included a $7.5 million litigation settlement gain.
- Security Products’ sales rose 4% in both comparison periods; nine-month gross margin was pressured by about $500,000 in higher medical self-insurance claims. Marine Components’ sales rose 16% in Q3 and 10% year to date, though the segment remained loss-making in operating income.
- Q3 2012 included a $405,000 write-down of assets held for sale, versus $1.1 million in Q3 2011. The first nine months of 2011 also included about $2.0 million of facility consolidation costs and $227,000 of litigation expense. These items affect period comparisons.
- Currency effects reduced Q3 operating income by $280,000 versus the prior-year quarter; the nine-month comparative impact was a net positive $58,000. The company used qualifying currency hedges, including contracts to exchange $4.2 million for Canadian dollars maturing through December 2012.
Outlook, risks, and other matters
Management gave no quantified earnings or sales guidance. It described demand as unstable: office-furniture customer demand remained weak, while acquired ergonomics sales and demand in other markets supported growth. Management said it was uncertain whether office-furniture sales would improve, how acquired-product demand would develop, or whether broader customer growth would continue. It expects lean-manufacturing and cost initiatives to support productivity and may adjust staffing to order levels.
Risks highlighted include demand and office-furniture exposure, commodity-cost volatility and limited ability to pass costs through, foreign-exchange movements, competition, execution of acquisitions and new products, litigation, operational interruptions, environmental and regulatory matters, tax outcomes, and credit-facility covenants. Management believed available cash, operating cash flow, and financing access would cover liquidity needs for the next 12 months and five years, subject to actual results and developments. Capital-project purchase commitments were $1.4 million. No material changes in risk factors or internal controls were reported; disclosure controls were judged effective.
Important facts for investors to verify
- Whether underlying demand—especially from office-furniture customers—improves, and whether acquired ergonomics sales persist.
- How much reported earnings improvement depends on the $778,000 contingent-consideration reversal and other nonrecurring comparison items.
- Whether Furniture Components’ mix and consolidation-related efficiency gains continue, and whether Marine Components can reach operating profitability.
- Cash conversion, working-capital trends, foreign-currency exposure, and the availability of cash held overseas.
- Debt terms and covenant headroom, the affiliate note repayment schedule, and the sustainability of dividends amid operating uncertainty.