CompX International Inc. — FY2015 Form 10-K
Business context and reporting period. CompX manufactures security locks and related products, as well as marine exhaust systems, gauges, controls and accessories. It reports two segments: Security Products and Marine Components. The fiscal year ended December 31, 2015 and included 53 weeks; 2014 included 52 weeks. NL Industries owned 87% of CompX’s common stock.
Financial performance and position
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $109.0 million | $103.8 million | +5% |
| Gross profit / margin | $33.4 million / 31% | $32.2 million / 31% | +4% gross profit |
| Operating income / margin | $14.0 million / 13% | $13.6 million / 13% | +3% |
| Net income | $9.1 million | $8.7 million | +5% |
| Diluted EPS | $0.73 | $0.70 | +$0.03 |
| Cash from operating activities | $13.5 million | $12.2 million | +$1.3 million |
| Capital expenditures | $4.2 million | $2.8 million | +$1.4 million |
| Cash and cash equivalents, year-end | $52.3 million | $45.6 million | +$6.8 million |
| Debt, year-end | $0 | $0 | No outstanding debt |
Year-end current assets were $76.9 million and current liabilities $12.1 million. Total assets were $134.8 million and stockholders’ equity $117.7 million. The company paid $2.5 million in dividends, or $0.20 per share, in 2015.
Material changes and segment results
- Security Products sales rose 5% to $95.6 million, principally on higher sales to existing government customers. Segment operating income was $18.6 million, slightly below 2014’s $18.7 million; margin declined from 20% to 19% amid customer/product mix, higher fixed costs and personnel costs.
- Marine Components sales grew 8% to $13.4 million, supported by ski/wakeboard boat demand and new product lines. Operating income increased to $1.4 million from $0.7 million; margin improved to 11% from 6%, reflecting pricing, mix, efficiencies and volume.
- Overall gross and operating margins were broadly stable year over year. Sales growth was the main contributor to higher operating income.
- Fourth-quarter 2015 sales were $25.7 million, operating income $2.6 million, net income $1.7 million and EPS $0.13. In fourth-quarter 2014, the respective figures were $24.7 million, $3.0 million, $1.7 million and $0.14.
- Cash from operations improved from 2014, with management citing more favorable working-capital movements. Inventory declined to $15.1 million from $16.9 million; total days in inventory returned to 76 from 90.
Outlook, risks and other notable items
- Management anticipated continued strong demand in 2016, but said government security demand was not expected to approach 2015 levels. More than $5 million of 2015 sales to a government security end-user was not expected to recur in 2016. Planned 2016 capital expenditures were approximately $4.4 million, funded from cash and operating cash flow.
- Management expected commodity-related raw material prices to remain relatively soft or stable into 2016. Materials were approximately 48% of 2015 cost of sales; commodity-related raw materials were approximately 10%. Sudden price increases and limited ability to pass costs through remain risks.
- Customer concentration is notable: the ten largest customers represented 48% of 2015 sales; the U.S. Postal Service and Harley-Davidson represented approximately 13% and 12%, respectively.
- CompX is exposed to competition and pricing pressure, demand and customer-mix changes, commodity costs, product-development and production risks, and environmental, litigation and tax uncertainties. The company reported substantial environmental-law compliance and did not expect current claims to have a material adverse effect.
- CompX is part of the Contran consolidated tax group and is jointly and severally liable for the group’s federal income tax obligations for periods of membership; NL agreed to indemnify CompX for amounts exceeding its tax-sharing-agreement liability.
- The board declared a $0.05-per-share first-quarter 2016 dividend. Future dividends remain discretionary. Management stated that cash on hand and operating cash flow should cover expected near-term liquidity needs.
- Management reported effective disclosure controls and internal control over financial reporting at year-end. The auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Whether the anticipated reduction in government-related sales in 2016 is offset by other customer demand and product growth.
- How customer concentration and government-customer exposure affect revenue stability and operating margins.
- Whether Marine Components’ margin improvement is sustainable and Security Products can stabilize its segment margin.
- Actual 2016 capital spending, cash generation, dividend decisions and any change in debt or capital allocation.
- Related-party service, insurance and tax-sharing arrangements, including the implications of CompX’s control structure and tax-group obligations.