Business context and reporting period
CompX International Inc. filed this Form 10-K for the fiscal year ended December 31, 2014. The company manufactures Security Products, including cabinet locks and electronic locks, and Marine Components, including marine exhaust systems, gauges and controls. All 2014, 2013 and 2012 fiscal years comprised 52 weeks. The filing also reports unaudited fourth-quarter results.
Financial performance and liquidity
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net sales | $103.8 million | $92.0 million | +13% |
| Gross profit / margin | $32.2 million / 31% | $27.6 million / 30% | +17% gross profit |
| Operating income / margin | $13.6 million / 13% | $9.3 million / 10% | +46% |
| Income from continuing operations | $8.7 million | $6.0 million | +44% |
| Net income | $8.7 million | $6.0 million | +44% |
| Diluted earnings per share | $0.70 | $0.49 | +$0.21 |
| Cash from operating activities | $12.2 million | $(4.1) million | +$16.3 million |
| Capital expenditures | $2.8 million | $3.5 million | Down $0.7 million |
Cash and cash equivalents were $45.6 million at year-end, up from $38.8 million. Current assets were $74.2 million and current liabilities $13.2 million. Working capital was approximately $61.0 million. The company had no outstanding debt at year-end, having prepaid its remaining debt in July 2013. Operating cash flow less capital expenditures was approximately $9.3 million in 2014. Total assets were $131.5 million and stockholders’ equity was $111.0 million.
The 2014 effective income tax rate on continuing operations was 37%, compared with 35% in 2013; management attributed the increase mainly to state taxes. Cash dividends were $0.20 per share for 2014, reflecting the quarterly rate reduction to $0.05 effective in the second quarter of 2013.
Segment performance
| Segment | 2014 sales | 2014 operating income (loss) | Change in sales vs. 2013 |
|---|---|---|---|
| Security Products | $91.5 million | $18.7 million | +12% |
| Marine Components | $12.4 million | $0.7 million | +17% |
Security Products growth reflected sales of new products to an existing government customer, transportation-market demand and increased electronic-lock penetration. Marine Components benefited from market-share gains in ski/wakeboard and other non-high-performance marine markets.
Material changes versus prior periods
- Sales rose $11.8 million in 2014, led by Security Products. Improved fixed-cost absorption at higher production volumes helped lift gross margin by one percentage point; product mix partly offset the benefit.
- Operating income increased $4.3 million. Marine Components moved from a $0.1 million operating loss in 2013 to $0.7 million operating income in 2014.
- Operating cash flow recovered from a $4.1 million use in 2013 to $12.2 million provided in 2014. The comparison was materially affected by approximately $11.6 million of tax payments in 2013 related to the 2012 sale of Furniture Components.
- Inventory increased from $13.2 million to $16.9 million; management attributed this partly to planned fourth-quarter builds for anticipated early-2015 sales. Total days in inventory increased from 76 to 90.
- The 2012 sale of Furniture Components generated a $27.6 million after-tax gain. That discontinued business contributed no sales or earnings in 2013 or 2014; therefore, annual net income comparisons exclude the unusually large 2012 disposal gain.
Fourth-quarter 2014
Unaudited fourth-quarter net sales were $24.7 million, gross profit $7.8 million, operating income $3.0 million, net income $1.7 million and diluted EPS $0.14. In fourth-quarter 2013, the corresponding figures were $22.3 million, $6.5 million, $2.0 million, $1.3 million and $0.11.
Outlook, commentary and risks
Management anticipated continued strong product demand in 2015, but did not expect government-security application demand to match 2014 levels. Small-business demand had been soft for much of 2014 but improved in the fourth quarter. Management planned to monitor order trends, adjust staffing as needed, pursue market-share gains and new markets, and continue lean-manufacturing and cost-improvement efforts. Estimated 2015 capital expenditures were approximately $3.9 million, expected to be funded from cash on hand and operating cash flow. Management expected the 2015 effective tax rate to be comparable to 2014 and stated that cash and operating cash flow should cover near-term liquidity needs and obligations over the next five years.
- Demand and concentration: The ten largest customers represented approximately 47% of 2014 sales; the U.S. Postal Service accounted for 13% and Harley-Davidson 12%. Government-related demand is expected to recede from 2014 levels.
- Costs and competition: Commodity-related raw materials were about 10% of cost of sales, while total materials, including purchased components, were about 49%. Zinc, brass and stainless steel prices can rise suddenly; the company may be unable to pass cost increases through to customers. The company does not hedge commodity prices.
- Other operating risks: The filing identifies competitive pricing, product-development and production scale-up challenges, customer or market changes, acquisitions, intellectual-property claims, environmental regulation, operational interruptions and general economic conditions as risks.
- Legal, environmental and tax matters: The company reported ordinary-course claims and disputes and believed their disposition would not have a material adverse effect. It reported substantial compliance with environmental laws and no material expected compliance costs, while noting future rules could increase costs. CompX is jointly and severally liable for the consolidated U.S. federal tax obligations of the Contran tax group for periods of inclusion; NL agreed to indemnify CompX for group tax liability exceeding its allocated liability.
- Related parties and governance: NL owned 87% of CompX. CompX paid Contran approximately $3.0 million for intercorporate services in 2014 and expected the same amount in 2015. The filing also describes shared insurance and related-party arrangements.
- Controls: A material weakness related to monitoring user access and segregation of duties in the new ERP system had been disclosed for the first half of 2014. Management reported remediation and effective controls as of December 31, 2014; the external auditor did not attest to internal-control effectiveness.
- Unusual item: The 2012 Furniture Components disposal produced an after-tax gain of $27.6 million and related tax and cash-flow effects, including the 2013 tax payment that depressed reported operating cash flow.
Most important facts for investors to verify
- Whether 2015 demand remains strong as government-security orders normalize, and whether planned inventory builds convert to sales without excess or obsolete stock.
- Whether customer concentration, particularly the Postal Service and Harley-Davidson, changes materially, and whether electronic-lock and marine market-share gains continue.
- Whether operating cash flow, margins and material costs remain resilient as volumes and commodity prices fluctuate.
- Whether the ERP access-control remediation continues to operate effectively and whether any subsequent control issues arise.
- Whether dividend decisions, related-party arrangements and the company’s exposure under the Contran tax-group structure remain consistent with the filing’s disclosures.