CompX International Inc. — Q1 2021 Form 10-Q
Reporting period: Quarter ended March 31, 2021; the company notes its actual quarter ended April 4, 2021. Comparisons below are with the three months ended March 31, 2020, unless stated otherwise. CompX manufactures security products and recreational marine components.
Financial performance and position
- Sales: $35.9 million, up 11.2% from $32.3 million. Security Products sales rose 2% to $25.9 million; Marine Components sales rose 47% to $10.0 million.
- Profitability: Gross margin was $11.0 million versus $10.4 million; gross margin rate declined to 30.7% from 32.3%. Operating income increased 15.9% to $5.8 million, with operating margin of 16.2% versus 15.5%. Net income rose 9.7% to $4.7 million; diluted EPS was $0.38 versus $0.34.
- Segment results: Security Products operating income fell 4% to $5.5 million, with margin declining to 21.2% from 22.4%. Marine Components operating income increased 80% to $1.9 million, with margin rising to 19.4% from 15.8%.
- Cash flow: Operating activities used $2.4 million, compared with $0.2 million used a year earlier. Capital expenditures were $0.6 million. Dividends paid were $2.5 million and $0.8 million was spent repurchasing shares. Cash declined $5.9 million during the quarter to $64.7 million.
- Liquidity and debt: At March 31, cash was $64.7 million, current assets $101.8 million and current liabilities $11.3 million. No debt is reported on the balance sheet. The company also held a $29.2 million receivable from affiliate Valhi.
- Other balance-sheet items: Total assets were $183.8 million and stockholders’ equity was $169.1 million. Accounts receivable increased to $16.9 million from $10.7 million at December 31, 2020.
Changes, outlook and risks
- Higher Marine Components sales—especially wake-enhancement systems and surf pipes sold to towboat-market customers—were the main driver of quarterly sales and operating-income growth. Recreational marine demand had strengthened since spring 2020.
- Security Products margin pressure reflected higher-cost inventory produced during lower-volume operations in late 2020. Lower employer-paid medical costs partly offset that pressure. Across the company, lower medical and travel expenses reduced operating costs.
- Management expected 2021 revenue and operating income to increase versus 2020 and expected recreational marine demand to remain strong. Some Security Products markets, particularly distributors and office furniture, had not returned to pre-pandemic levels. Management cautioned that higher fixed costs per unit could continue to challenge that segment’s gross margins.
- COVID-19 effects, customer demand, supply-chain disruptions, raw-material and other operating costs, competition, operating interruptions, and general economic conditions were identified as risks. Supply-chain disruptions had caused some customer pauses, but management said they had not materially reduced sales to date and had caused minimal operational impact.
- The quarterly dividend was increased from $0.10 to $0.20 per share beginning in Q1 2021. Future dividends remain discretionary. The company repurchased and canceled 50,000 shares for approximately $755,000; 627,547 shares remained available under the repurchase authorization.
- The Valhi affiliate note is unsecured, bears interest at prime plus 1%, and is payable on demand, but not before December 31, 2022. Loans are made at CompX’s discretion. Related-party credit exposure and affiliate control are relevant considerations.
- Management reported effective disclosure controls, no material change in internal control over financial reporting, and no material changes to previously disclosed risk factors or contractual obligations. Interim results may not indicate full-year results.
Important facts for investors to verify
- Whether marine demand and towboat-market sales remain strong, and whether slower-recovering Security Products markets improve.
- Whether Security Products margins recover as higher-cost inventory clears and production volumes normalize.
- Working-capital and collection trends: operating cash flow was negative despite higher earnings, and receivables increased substantially during the quarter.
- Valhi note terms, repayment and credit exposure, and the effect of affiliate-related-party arrangements.
- The sustainability of the higher dividend and future share repurchases relative to cash generation and capital needs.