CompX International Inc. — 2013 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013 (52 weeks), with fourth-quarter results also presented. CompX manufactures security products and recreational marine components. NL Industries owned 87% of CompX at year-end.
Financial performance and liquidity
- Full-year revenue: $92.0 million, up 11% from $83.2 million in 2012. Security Products sales rose 11% to $81.5 million; Marine Components sales rose 11% to $10.5 million.
- Profitability: Gross profit was $27.6 million (30% margin), versus $24.3 million (29%) in 2012. Operating income increased 72% to $9.3 million (10% margin), from $5.4 million (7%). Continuing-operations net income was $6.0 million, or $0.49 per diluted share, versus $3.5 million, or $0.28 per share.
- Segment results: Security Products operating income increased to $16.1 million from $14.1 million. Marine Components remained loss-making, but its operating loss narrowed to $0.1 million from $0.8 million.
- Fourth quarter: Sales were $22.3 million, gross profit $6.5 million, operating income $2.0 million, and net income $1.3 million. Fourth-quarter 2012 net income of $28.7 million included the gain on the Furniture Components sale; 2012 fourth-quarter operating income was nil after asset-related charges.
- Cash flow: Operating activities used $4.1 million, compared with $13.8 million provided in 2012. The 2013 figure was chiefly affected by approximately $11.6 million of tax paid related to the 2012 business sale. Investing activities provided $1.0 million; financing activities used $21.9 million, including $18.5 million of debt repayment and $3.4 million of dividends.
- Balance sheet: Cash was $38.8 million, down from $63.8 million; current assets were $63.6 million and current liabilities $10.1 million. Total assets were $121.7 million and equity $104.7 million. Long-term debt and current debt maturities were zero at year-end, following full repayment in July 2013.
- Capital and distributions: Capital expenditures were $3.5 million in 2013; management estimated approximately $3.2 million for 2014. The quarterly dividend was reduced from $0.125 to $0.05 per share beginning in the second quarter of 2013; future dividends remain discretionary.
Material changes versus prior periods
- Higher demand for high-security pin tumbler locks drove much of 2013’s sales and operating-income growth; marine sales also increased, including outside the high-performance boat market.
- Improved volume and production efficiencies supported gross-margin recovery. Higher self-insured medical costs—$598,000 in Security Products—partly offset the improvement.
- CompX sold its Furniture Components segment in December 2012 for approximately $58.0 million net cash proceeds and recognized a $29.6 million pretax disposal gain ($27.6 million after tax). Consequently, 2012 reported net income is not directly comparable with 2013.
- Cash declined by $25.0 million in 2013, reflecting debt repayment, dividends and operating cash use, including the disposal-related tax payment.
Outlook, risks and unusual items
- Management said demand remained uncertain and could not predict the extent of sales growth in 2014. It expected positive operating cash flow in 2014 and planned ongoing cost, productivity and market-share initiatives.
- Management expected commodity-related raw-material prices to increase moderately in 2014. Zinc, brass and stainless steel together represented about 11% of cost of goods sold; CompX does not hedge commodity prices and may have difficulty passing cost increases to customers.
- Marine Components had continued operating losses. Management found no long-lived-asset impairment in 2013, but stated that cash flows approximately 85% below expectations for each of its Custom Marine and Livorsi Marine reporting units could make impairment reasonably likely. The segment’s goodwill had been impaired in 2008.
- Customer concentration is material: the ten largest continuing-operations customers represented 42% of 2013 sales. San Mateo Postal Data and Harley-Davidson each represented about 12%–13% of sales.
- CompX participates in the Contran consolidated tax group and is jointly and severally liable under law for group federal income taxes for covered periods; NL agreed to indemnify CompX for amounts exceeding its allocated tax liability. Related-party service fees were $3.9 million in 2013; management expected $3.0 million in 2014.
- The filing identifies competitive pricing, customer demand, raw-material costs, product development, litigation, environmental compliance and operational interruptions as risks. Management believed existing legal claims and environmental matters were not expected to have a material adverse effect. Financial-statement auditors issued an unqualified opinion; management reported effective internal controls, which were not subject to auditor attestation.
Important facts for investors to verify
- Whether 2014 demand and order trends sustain the 2013 sales gains, particularly in high-security locks and marine markets.
- Whether Marine Components can achieve sustained profitability and whether its asset and goodwill carrying values remain recoverable.
- How commodity prices, medical costs and pricing competition affect gross and operating margins.
- Cash conversion after the one-time disposal-related tax payment, and the ability to fund capital spending and any future dividends from operations.
- Exposure from customer concentration, related-party arrangements and membership in the Contran tax group.