CompX International Inc. — Q3 2022 Form 10-Q
Business and period: CompX manufactures security locks and related products, and marine components. This unaudited report covers the quarter and nine months ended September 30, 2022; the company notes its actual quarter ended October 2, 2022. Amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $42.9 | $34.6 | $126.6 | $106.7 |
| Gross margin | $11.9 (27.8%) | $10.9 (31.6%) | $37.6 (29.7%) | $33.3 (31.2%) |
| Operating income | $5.9 (13.8%) | $5.1 (14.8%) | $20.0 (15.8%) | $16.7 (15.7%) |
| Net income | $5.0 | $4.1 | $16.1 | $13.4 |
| Diluted EPS | $0.40 | $0.33 | $1.30 | $1.08 |
Cash flow and balance sheet: Nine-month operating cash flow was $8.1 million, broadly unchanged from $8.1 million a year earlier. Capital expenditures were $3.0 million. Cash declined to $53.3 million at September 30, 2022 from $76.6 million at year-end 2021, largely alongside $30.8 million of dividends and $1.7 million of share repurchases. Current assets were $108.4 million and current liabilities $17.5 million. The balance sheet reports no borrowings; it does show a $14.7 million note receivable from affiliate Valhi. Stockholders’ equity was $156.8 million.
Changes and segment results
- Q3 sales rose 24% and nine-month sales rose 19% year over year. Net income increased about 20% in both comparisons.
- Security Products sales rose 10% in Q3 and nine months, but Q3 operating income fell 11% to $4.9 million; margin pressure reflected higher inventory costs not fully offset by price increases and surcharges. Nine-month operating income increased 5% to $17.6 million.
- Marine Components sales rose 65% in Q3 and 45% year to date, led by the towboat market. Operating income increased 116% in Q3 to $2.7 million and 55% year to date to $7.4 million.
- Overall gross margin percentage declined, particularly in Q3, despite higher sales. Management attributed pressure to higher material, shipping and labor costs, most notably in Security Products and earlier in the year in Marine Components.
Outlook, risks and notable items
- Management expected full-year 2022 net sales and operating income to increase at both segments compared with 2021. It expected Security Products margins to remain pressured through year-end as higher-cost inventory moved through cost of sales; Marine Components was expected to maintain margins comparable to 2021 in Q4 after model-year price increases.
- Supply chains remained challenging for some raw materials and components, including electronic components, with longer lead times, shortages and logistics delays. Labor, shipping and raw-material costs remained elevated; the company said price increases and surcharges had only partially offset cost inflation, especially at Security Products.
- The company paid a $1.75-per-share special dividend in August 2022 and increased its regular quarterly dividend from $0.20 to $0.25 per share. Nine-month dividends totaled $30.8 million. Future dividends are discretionary.
- CompX may lend Valhi up to $30 million under an unsecured revolving demand note bearing interest at prime plus 1%; $14.7 million was outstanding at quarter-end. Management cited affiliate credit risk, and lending is at CompX’s discretion.
- Management stated cash, operating cash flow and access to external financing should meet liquidity needs over the next 12 months and five years. It expected 2022 capital investment of $4.7 million; $0.5 million of capital-project commitments remained at quarter-end.
- Other cited risks include demand changes, commodity costs and pass-through ability, competition, supply-chain and operating disruptions, litigation, environmental matters and tax uncertainties. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether subsequent results confirm management’s full-year growth outlook and Q4 segment margin expectations.
- How much elevated input and labor costs continue to affect margins, and whether pricing and surcharges recover those costs.
- Inventory growth to $33.3 million from $25.6 million at year-end, including the effect of longer lead times and availability issues on cash conversion.
- Valhi’s repayment of the $14.7 million affiliate receivable and the credit and liquidity implications of the revolving note.
- The sustainability of the increased dividend following the special distribution, alongside ongoing capital spending and share repurchases.