CompX International Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. CompX manufactures security products and recreational marine components. It was 87% owned by NL Industries; the filing notes that related parties may be deemed to control CompX.
Financial results
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net sales | $27.1m | $28.9m | $54.2m | $56.8m |
| Gross profit / margin | $8.5m / 31.3% | $9.2m / 31.7% | $16.7m / 30.8% | $17.7m / 31.2% |
| Operating income / margin | $3.7m / 13.7% | $4.3m / 14.9% | $7.1m / 13.0% | $8.0m / 14.1% |
| Net income | $2.4m | $2.8m | $4.6m | $5.2m |
| Diluted EPS | $0.20 | $0.23 | $0.37 | $0.42 |
Amounts are in U.S. dollars. Sales declined 6% in Q2 and 5% for the first half; operating income fell 14% and 12%, respectively. The filing attributes the sales shortfall primarily to approximately $1.6m of Q2 and $3.2m of first-half 2015 government security customer sales that did not recur. Lower production volumes reduced fixed-cost absorption and margins; product and customer mix partly offset this effect.
- Segments: First-half Security Products sales declined 6% to $46.6m and operating income declined 9% to $9.3m. Marine Components sales grew 7% to $7.6m, supported by demand in the waterski/wakeboard boat market; operating income increased 3% to $0.9m. Q2 Marine sales rose 1%, while segment operating income fell 8% on lower production volumes and reduced fixed-cost leverage.
- Cash flow: First-half operating cash flow was $1.9m, versus $0.6m a year earlier. Capital expenditures were $1.7m, yielding approximately $0.2m of operating cash flow after capital spending. Dividends paid were $1.2m; cash declined $1.0m from year-end to $51.3m. Quarterly dividends were $0.05 per share.
- Liquidity and debt: At June 30, cash was $51.3m, current assets $79.1m, and current liabilities $10.6m. No borrowings are reported on the balance sheet. The company stated that cash, operating cash flow, and potential external financing should cover expected needs. Capital project purchase commitments were $0.4m.
- Balance sheet: Total assets were $136.8m and stockholders’ equity $121.2m at June 30, compared with $134.8m and $117.7m, respectively, at December 31, 2015.
Outlook, risks, and notable items
Management expected 2016 sales to remain relatively comparable to 2015, excluding more than $5m of nonrecurring 2015 sales to a single government security customer, and assuming no improvement in general economic conditions. It said stronger-than-anticipated second-half sales and profitability were possible if market-share, product-development, and customer initiatives succeed. No numerical earnings guidance was provided.
Management cited risks including demand fluctuations, raw-material and energy costs, competition from lower-cost producers, product mix and pricing, litigation, environmental and tax matters, regulation, operational interruptions, and general economic conditions. It reported no material changes in risk factors or market risks, and no material changes in contractual obligations. Interim results may not indicate full-year performance.
Related-party transaction: On August 3, 2016, after quarter-end, CompX agreed to make discretionary loans to Valhi under an unsecured revolving demand note of up to $40m. Interest is prime plus 1%, payable quarterly; principal is due on demand, but not before December 31, 2017. The potential loans are a use of CompX liquidity and involve a related party. CompX also disclosed that it may receive lower credit quality on affiliate loans than on cash-equivalent investments.
The company reported effective disclosure controls and no material changes in internal control over financial reporting. It expected to adopt the new revenue-recognition standard in the first quarter of 2018 and was still evaluating its effect.
Important facts for investors to verify
- Whether the lost government-customer sales are fully reflected in management’s comparable-sales outlook, and how much future business remains with that customer.
- Whether Security Products demand and manufacturing volumes recover, and whether Marine Components growth continues beyond the first half.
- Actual terms, amount, and duration of any loans to Valhi, and the resulting effect on CompX’s cash availability and related-party credit exposure.
- Whether operating cash flow improves while the company funds capital spending and dividends.
- Potential effects of raw-material cost changes, customer/product mix, and the upcoming revenue-recognition standard; the filing does not provide a quantified outlook for these items.