CompX International Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; comparisons are with the corresponding 2013 periods unless otherwise noted. CompX manufactures security products and recreational marine components and is approximately 87% owned by NL Industries. Financial amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net sales | $26.848 | $24.039 | $52.629 | $45.492 |
| Gross profit | $8.613 | $7.610 | $16.362 | $13.630 |
| Gross margin | 32.1% | 31.7% | 31.1% | 30.0% |
| Operating income | $3.912 | $2.943 | $7.200 | $4.377 |
| Operating margin | 14.6% | 12.2% | 13.7% | 9.6% |
| Net income | $2.556 | $1.814 | $4.696 | $2.709 |
| Diluted EPS | $0.21 | $0.15 | $0.38 | $0.22 |
- Q2 sales rose 12%, operating income 33%, and net income 41%. First-half sales rose 16%, operating income 64%, and net income 73%.
- First-half segment sales were $46.009 million in Security Products, up 16%, and $6.620 million in Marine Components, up 16%. Segment operating income was $9.542 million and $0.505 million, respectively; corporate operating expenses were $2.847 million.
- Six-month operating cash flow was $1.702 million, versus cash used of $11.453 million in first-half 2013. The comparison largely reflects $10.7 million less cash paid for taxes in 2014; 2013 included tax payments related to a prior sale of disposed operations.
- Capital expenditures were $1.624 million; investing cash flow was negative $1.624 million. Dividends paid were $1.240 million, and cash declined $1.162 million from year-end to $37.591 million.
Financial position and liquidity
- At June 30, 2014, cash was $37.591 million, current assets $68.702 million, current liabilities $11.616 million, and stockholders’ equity $108.261 million.
- No outstanding debt is shown on the balance sheet; the company reported no interest expense in the first half. The filing describes liquidity as supported by operating cash flow, cash on hand, and potential external financing.
- Accounts receivable increased to $12.281 million from $8.534 million at year-end, and inventories rose to $15.875 million from $13.235 million. Management attributed elevated Security Products inventory to new product introductions and precautionary stocking of long-lead-time components.
- Capital-project purchase commitments were $381,000. Management stated cash and expected financing capacity should meet needs for working capital, capital expenditures, debt service, and dividends over the next 12 months and five years, subject to actual results and developments.
Material changes, outlook, and risks
- Management attributed revenue growth primarily to Security Products demand, including new products for an existing government customer, electronic-lock market penetration, and transportation demand. Marine Components benefited from market-share gains in ski/wakeboard and other non-high-performance marine markets.
- Higher production volumes improved fixed-cost absorption and first-half margins. In Q2, this benefit was partly offset by a $360,000 increase in medical expenses and higher Security Products administrative costs. Management said selling-price changes did not materially affect sales comparisons.
- Management cautioned that strong first-half demand should not be taken as a full-year trend because of seasonality and one-time customer projects. It described demand trends in many served markets as positive, but provided no numerical guidance.
- Commodity-cost volatility is expected to continue. Zinc, brass, and stainless steel represented about 11% of cost of goods sold; competitive conditions may limit the company’s ability to pass cost increases to customers. Other cited risks include demand changes, low-cost competition, product substitution, economic conditions, litigation, environmental and regulatory matters, operating interruptions, and execution of new products or systems.
- A material weakness in internal control was identified after implementation of a new ERP system in Q1: controls for monitoring user access and segregation of duties were not effective. The weakness had not caused a financial-statement misstatement, but could prevent timely detection of one. Remediation procedures began in July 2014; disclosure controls were deemed ineffective as of June 30.
- The company was evaluating the effect and adoption method of the new revenue-recognition standard, effective for it beginning in Q1 2017. No material changes to contractual obligations or previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether ERP access and segregation-of-duties controls were remediated and tested effectively after the quarter.
- How recurring demand develops after seasonal effects and one-time customer projects, particularly in Security Products.
- Whether inventory growth converts into sales and cash flow, and whether working-capital needs remain elevated.
- Whether medical, raw-material, and other operating-cost pressures affect margins or can be offset through productivity and pricing.
- Dividend policy and liquidity assumptions, including the company’s stated reliance on operating cash generation and access to external financing.