CompX International Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Dollar amounts below are in millions unless noted. CompX manufactures security products and recreational marine components; its Furniture Components segment was sold in December 2012, so 2012 comparisons include discontinued-operation results separately.
Financial performance
| Metric | Q3 2012 | Q3 2013 | Nine months 2012 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $21.281 | $24.209 | $63.856 | $69.701 |
| Gross profit / margin | $6.310 / 30% | $7.514 / 31% | $18.831 / 29% | $21.144 / 30% |
| Operating income / margin | $1.635 / 8% | $2.977 / 12% | $5.376 / 8% | $7.354 / 10% |
| Continuing-operations income | $0.884 | $1.956 | $2.952 | $4.666 |
| Net income | $2.609 | $1.956 | $6.225 | $4.666 |
| EPS, continuing operations | $0.07 | $0.16 | $0.24 | $0.38 |
| EPS, net income | $0.21 | $0.16 | $0.50 | $0.38 |
- Sales rose 14% in Q3 and 9% for the first nine months. Growth was led by Security Products, particularly high-security pin tumbler locks; Marine Components also grew, supported by gains in non-high-performance marine markets.
- Security Products Q3 sales were $21.457 million and operating income was $4.578 million; Marine Components sales were $2.752 million and operating loss was $0.017 million. For nine months, segment sales were $61.258 million and $8.443 million, respectively; operating income was $12.245 million and $0.185 million.
- Q3 2013 net income was below 2012 because the prior-year quarter included $1.725 million of after-tax discontinued-operations income. Continuing-operations income improved. The same discontinued-operations effect explains the lower nine-month net income comparison.
Cash, liquidity and capital
- Cash and cash equivalents were $36.591 million at September 30, versus $63.777 million at December 31, 2012. Total assets were $121.545 million; stockholders’ equity was $103.999 million.
- Operating cash flow was a use of $7.866 million for the first nine months, compared with cash provided of $6.430 million in 2012. Management attributed the deterioration principally to $10.2 million of higher net taxes paid, including tax related to the 2012 business sale, working-capital movements, and the absence of 2012 cash flows from the disposed business.
- Investing activities provided $1.949 million, including $3.034 million collected on a note receivable and $1.559 million of proceeds from a facility sale; capital expenditures were $2.550 million. Financing activities used $21.269 million, including $18.480 million of debt repayment and $2.789 million of dividends.
- CompX prepaid its remaining debt in July 2013 without penalty; no debt remained at September 30. Cash was held in the U.S. The company stated that cash, operating cash flows and access to external financing should meet liquidity needs over the next 12 months and five years, subject to actual results and developments. Capital-project commitments were $0.549 million.
- The regular quarterly dividend was reduced in May 2013 from $0.125 to $0.05 per share, effective with the second-quarter dividend. Future dividends remain discretionary.
Management outlook, risks and notable items
- Management said demand remains unstable and it is uncertain whether total sales will continue to grow through the remainder of 2013 and into 2014. It cited lean-manufacturing and cost initiatives, staffing adjustments as needed, market-share efforts and product development.
- Zinc, brass and stainless steel represent about 10% of cost of goods sold. Commodity-price volatility may pressure margins; the company may not be able to recover cost increases through pricing or surcharges.
- Higher self-insured medical costs partly offset operating improvements: expense rose $0.142 million in Q3 and $0.274 million in the first nine months versus 2012.
- A $0.405 million write-down of assets held for sale was recorded in Q3 2012; no such charge was recorded in 2013. A facility sale closed in Q1 2013 for net proceeds of approximately $1.6 million, near carrying value. The Taiwan land sale generated $3.0 million in note collections during the first half of 2013.
- Other disclosed risks include product demand, competition and pricing, raw-material and operating costs, regulation, tax matters, litigation, operational interruptions and general economic conditions. The filing reports no material changes to previously disclosed risk factors, market risks, contractual obligations (apart from debt prepayment), or internal controls.
Important facts for investors to verify
- Whether increased high-security lock demand and marine-market share gains persist, given management’s uncertainty about near-term demand.
- Whether operating cash generation recovers after the tax and working-capital-related cash outflows; distinguish these items from recurring operating performance.
- How commodity costs and self-insured medical expenses affect margins, and whether efficiency gains or pricing can offset them.
- Future dividend decisions and liquidity, particularly in light of the reduced dividend and management’s assumptions underlying its liquidity assessment.
- The continuing-versus-discontinued presentation when comparing 2013 with 2012, including the prior-year disposed-segment contribution to sales and earnings.