CompX International Inc. — Q2 2023 Form 10-Q
Business and period: CompX manufactures security products and marine components. This unaudited report covers the three and six months ended June 30, 2023, compared with the same 2022 periods; the company notes its actual quarter-end was July 2, 2023. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $36.6 | $41.7 | $77.8 | $83.7 |
| Gross margin | $10.3 (28.1%) | $13.6 (32.7%) | $23.0 (29.5%) | $25.7 (30.7%) |
| Operating income | $4.4 (12.0%) | $7.7 (18.6%) | $11.4 (14.7%) | $14.1 (16.8%) |
| Net income | $4.1 | $6.2 | $10.1 | $11.2 |
| Diluted earnings per share | $0.33 | $0.50 | $0.82 | $0.90 |
| Operating cash flow | Not separately stated for the quarter | $9.8 | $1.5 |
Q2 sales fell 12% year over year and operating income fell 44%. For the first half, sales declined 7% and operating income declined 19%. SG&A was essentially flat in Q2; lower sales and gross margin drove most of the profit decline. Interest income increased to $1.0 million in Q2 and $1.9 million for the first half, primarily reflecting higher rates and investment balances.
Segments and balance sheet
- Security Products: Q2 sales decreased 11% to $25.7 million and operating income fell 39% to $4.1 million. First-half sales decreased 9% to $53.0 million and operating income fell 25% to $9.5 million. Management attributed the sales decline principally to lower government security demand, including nonrecurring 2022 sales to one customer.
- Marine Components: Q2 sales decreased 15% to $10.9 million and operating income fell 29% to $1.9 million, mainly reflecting lower towboat-market sales. First-half sales were down 2% to $24.8 million, while operating income rose 11% to $5.3 million, supported by first-quarter product mix, pricing and production efficiencies.
- At June 30, cash was $18.0 million and marketable securities were $46.8 million, totaling $64.8 million, versus $59.9 million at year-end. Current assets were $115.2 million and current liabilities $14.8 million. No borrowings or debt balance are reported on the balance sheet.
- Operating cash flow of $9.8 million exceeded the prior-year $1.5 million, primarily due to more favorable working-capital movements. Investing cash outflow was $12.4 million, including $24.9 million of Treasury purchases, partly offset by maturities and net collections on the affiliate note. Financing cash outflow was $6.2 million of dividends.
- Inventory increased to $33.8 million from $31.3 million. The company reported 117 days in inventory at June 30, compared with 99 days at December 2022, partly due to a planned build for customer orders. Total stockholders’ equity was $162.4 million.
Outlook, risks and other items
- Management expects lower operating income at both segments in 2023 than in 2022. It reported accelerating demand weakness in Q2, particularly in marine, and expects Security Products’ declining order rates to continue through Q3. Higher-cost inventory and limited scope for further price increases are expected to pressure Security Products’ margins over the remainder of the year.
- Management expects Marine Components sales to remain challenged by towboat weakness, higher interest rates and reduced boatmaker production schedules; industrial sales are not expected to fully offset the decline. Full-year Marine Components gross-margin percentage is expected to be comparable to 2022.
- Labor availability and material prices have improved or stabilized, and supply chains are generally stable, although lead times remain long for certain electronic and specialty components. The company expects approximately $2.7 million of capital expenditures in 2023; firm commitments for projects in process were $0.1 million.
- Liquidity is supported by cash, securities and operating cash flow. Management believes resources and financing access will meet needs for the next 12 months and five years, subject to actual results and developments. Dividends are discretionary; $0.50 per share was paid during the first half.
- CompX held an unsecured revolving demand note receivable from affiliate Valhi with $12.2 million outstanding. The note bears interest at prime plus 1%, is due on demand but no earlier than December 31, 2024, and additional lending is at CompX’s discretion. CompX was approximately 87% owned by NL Industries.
- Risks identified include demand and economic conditions, raw-material and operating costs, competition, supply-chain disruptions, geopolitical events, operational interruptions, regulation, litigation and tax matters. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether weaker government-security orders and towboat demand persist, and whether the expected Q3 order trends materialize.
- Whether planned Security Products orders ship as expected and inventory levels normalize without margin deterioration.
- How much the $12.2 million affiliate receivable and broader related-party arrangements affect liquidity and investment risk.
- Whether the full-year operating-income outlook, marine margin expectations and approximately $2.7 million capital-spending plan remain achievable.
- Future dividend decisions and the impact of Treasury-security valuation changes; marketable securities had an unrealized loss of $0.15 million at June 30.