CompX International Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 30, 2018 (52 weeks); figures are presented as of December 31. Comparisons are with FY2017. This is an annual report, not a standalone fourth-quarter filing.
Business context
CompX manufactures security products, including cabinet locks and locking mechanisms, and recreational marine components, including exhaust systems, gauges, controls, wake enhancement systems and trim tabs. Its two reportable segments are Security Products and Marine Components. NL Industries owned 87% of CompX at year-end.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $118.2 million | $112.0 million |
| Gross profit / margin | $38.3 million / 32.4% | $34.8 million / 31.1% |
| Operating income / margin | $17.8 million / 15.1% | $15.2 million / 13.6% |
| Net income | $15.3 million | $13.2 million |
| Diluted earnings per share | $1.23 | $1.06 |
| Cash from operating activities | $17.2 million | $12.6 million |
- Sales increased 6%; management attributed growth primarily to higher Marine Components volumes and, to a lesser extent, stronger Security Products sales. Gross margin improvement reflected better fixed-cost absorption from higher production.
- Marine Components sales rose 29% to $19.8 million, with operating income of $2.7 million versus $1.3 million. Security Products sales rose 2% to $98.4 million, with operating income of $21.9 million versus $19.2 million.
- Year-end cash was $45.4 million, up from $29.7 million; current assets were $76.3 million and current liabilities $13.7 million. The balance sheet reports no borrowings. Stockholders’ equity was $149.6 million.
- Capital expenditures were $3.1 million. Investing activities provided $1.1 million, reflecting affiliate-loan collections and advances, net of capital spending. Cash dividends paid were $2.5 million ($0.20 per share).
- CompX held a $34.0 million note receivable from affiliate Valhi at fiscal year-end, bearing interest at prime plus 1% (6.5% at December 31, 2018). The filing states that a further $6.0 million loan was made on December 31, after CompX’s fiscal year-end, bringing the balance to $40.0 million.
Material changes, outlook and risks
- Net income increased 16% year over year. FY2017 included a $1.9 million non-cash tax benefit from revaluing deferred taxes after U.S. tax reform; the FY2018 effective tax rate was 25%, versus 23% in 2017. Management expected the 2019 effective rate to be comparable to 2018.
- Management aimed to sustain sales and profitability growth in 2019 through market-share gains, new markets and product features, and lean-manufacturing and cost initiatives. It provided no numerical sales or earnings guidance.
- Management estimated 2019 capital expenditures of approximately $4.8 million, to be funded by cash and operating cash flow, and stated that available cash and expected operating cash flow should meet liquidity needs over the next 12 months and long-term obligations over five years.
- The board declared a first-quarter 2019 dividend of $0.07 per share, up from the regular $0.05 quarterly dividend paid in 2018. Future dividends remain discretionary.
- Key exposures include competitive pricing, demand and customer/product mix, and potential volatility in zinc, brass, stainless steel and other input costs. Commodity-related raw materials represented about 12% of cost of sales; total material costs were about 45%. CompX does not hedge raw materials.
- Customer concentration is notable: the largest customer, the U.S. Postal Service, represented 13% of 2018 sales; the ten largest customers accounted for 44%. Other disclosed risks include cyber incidents, intellectual-property claims, environmental regulation and operational interruptions.
- CompX reported related-party relationships, including affiliate lending and shared services and insurance arrangements. It is jointly and severally liable for the Contran tax group’s federal tax obligations, while NL has agreed to indemnify CompX for amounts exceeding its allocated tax liability.
- Legal claims and disputes were described as incidental to the business and not expected to have a material adverse effect. Management reported effective disclosure controls and internal control over financial reporting; the auditor gave an unqualified opinion on the financial statements.
Important facts for investors to verify
- Review the terms, collectability and related-party governance of the Valhi note, including the post-year-end $6.0 million advance and its effect on CompX’s liquidity and affiliate exposure.
- Track whether Marine Components’ strong growth and improved fixed-cost absorption continue, and whether Security Products maintains its margins.
- Assess customer concentration and the ability to offset commodity, labor and other cost increases in competitive markets.
- Confirm the 2019 capital-spending plan, dividend policy and the reported assumption that cash resources cover near- and longer-term obligations.
- Review the full notes for tax-group liability, shared insurance arrangements, purchase commitments and other contingencies.