CompX International Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Unless noted otherwise, amounts below are in millions of dollars; filing amounts are reported in thousands. CompX manufactures security products and recreational marine components. It sold its Furniture Components segment in December 2012, so 2013 results reflect continuing operations; 2012 income statements present the sold business as discontinued operations.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $24.0 | $22.1 | $45.5 | $42.6 |
| Gross profit | $7.6 | $6.5 | $13.6 | $12.5 |
| Gross margin | 31.7% | 29.4% | 30.0% | 29.4% |
| Operating income | $2.9 | $2.2 | $4.4 | $3.7 |
| Operating margin | 12.2% | 9.7% | 9.6% | 8.8% |
| Income from continuing operations | $1.8 | $1.2 | $2.7 | $2.1 |
| Net income | $1.8 | $2.1 | $2.7 | $3.6 |
| Basic and diluted EPS | $0.15 | $0.17 | $0.22 | $0.29 |
Sales increased 9% in Q2 and 7% in the first half. Security Products sales rose 8% and 6%, respectively; Marine Components sales rose 11% in both periods. Continuing-operations earnings improved, while reported net income declined because the comparable 2012 periods included income from the subsequently sold Furniture Components business ($0.9 million in Q2 and $1.5 million in the first half).
Cash flow, balance sheet and capital allocation
- Cash and equivalents were $52.7 million at June 30, down from $63.8 million at December 31, 2012. Total debt was $18.0 million, including $1.0 million current maturities. In July 2013, CompX prepaid the remaining debt principal and accrued interest without penalty.
- Current assets were $78.9 million and current liabilities $10.3 million at June 30. Stockholders’ equity was $102.7 million; total assets were $136.6 million.
- First-half operating cash flow was a use of $11.5 million, versus $1.6 million provided in 2012. Management attributed the deterioration mainly to $9.9 million of higher net tax payments, including tax related to the 2012 business sale, and less favorable working-capital movements. Cash flow comparisons also include the sold business in 2012.
- Investing activities provided $3.1 million, including $3.0 million collected on a note receivable tied to the sale of Taiwan land and $1.6 million of facility-sale proceeds; capital expenditures were $1.5 million.
- Financing activities used $2.7 million, including $2.2 million of dividends and $0.5 million of debt repayment. The board reduced the regular quarterly dividend from $0.125 to $0.05 per share effective with Q2 2013; future dividends remain discretionary.
Changes, outlook and risks
Management cited stronger postal-product demand, particularly as the U.S. Postal Service expands centralized delivery, and Marine Components market-share gains outside the high-performance boat market. Higher sales improved manufacturing efficiencies; lower self-insured medical costs also supported Q2 results. Q2 Security Products medical expense was $184,000 lower year over year. Commodity raw materials—principally zinc, brass and stainless steel—represented about 10% of cost of goods sold.
Management said overall demand remained unstable and it was uncertain whether sales growth would continue through the rest of 2013; the filing provides no quantitative earnings or revenue guidance. The company planned to align staffing with order rates, pursue lean-manufacturing and cost improvements, and seek market-share gains and new products. Risks include demand weakness, raw-material cost inflation and limited ability to pass increases through, competition, pricing and production decisions, regulatory and environmental matters, tax audits, litigation, operational interruptions, and general economic conditions. Management believed cash, operating cash flow and access to external financing would be sufficient for liquidity needs over the next 12 months and five years, while warning that materially different results could weaken liquidity.
No material change in contractual obligations or risk factors was reported; firm capital-project commitments were $1.1 million. The filing reports no material change in market risks and states that disclosure controls were effective as of June 30, 2013.
Important facts for investors to verify
- How postal-market demand and Marine Components market-share gains develop, given management’s uncertainty about continued sales growth.
- The drivers and sustainability of the operating-margin improvement, including manufacturing efficiencies and the unusually favorable Q2 medical-cost comparison.
- Cash conversion and working-capital needs after the first-half operating cash outflow, including the effect of taxes associated with the disposed business.
- The post-quarter debt prepayment’s precise cash and interest effects, and the board’s future dividend decisions.
- Exposure to commodity-cost increases and the company’s ability to offset or recover them in competitive markets.