CompX International Inc. — Q2 2011 Form 10-Q
Business and period: CompX manufactures security products, furniture components, and marine components. This unaudited report covers the three and six months ended June 30, 2011; comparisons are with the same 2010 periods. Amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $35.2 | $34.4 | $70.0 | $67.2 |
| Gross profit | $9.8 | $8.9 | $18.5 | $18.0 |
| Gross margin | 28% | 26% | 26% | 27% |
| Operating income | $3.1 | $2.9 | $11.9 | $4.7 |
| Net income | $1.6 | $1.7 | $5.6 | $0.8 |
| Basic and diluted EPS | $0.13 | $0.14 | $0.45 | $0.06 |
- Q2 sales increased about 2% and six-month sales about 4%. Q2 gross margin improved, but first-half gross margin declined by one percentage point.
- First-half operating income included a $7.5 million patent settlement gain. It also included $1.8 million of facility consolidation costs and $0.2 million of litigation expense. Thus, reported first-half profit growth is not a straightforward indicator of recurring performance.
- By segment, first-half sales increased 6% in Security Products and 2% in Furniture Components; Marine Components sales were essentially flat. Q2 Furniture Components operating income fell to $0.8 million from $1.1 million, including $0.8 million of consolidation costs.
- Six-month operating cash flow was $2.8 million, versus $1.1 million in 2010. Capital expenditures were $1.3 million; dividends paid were $3.1 million. Cash fell to $5.1 million from $13.9 million at year-end, reflecting debt repayments, dividends, and operating and investing cash flows.
- At June 30, current assets were $63.0 million and current liabilities $17.5 million. Total debt was $37.7 million, including $1.0 million current; stockholders’ equity was $87.1 million. Debt was down from $45.2 million at year-end. The company also held a $15.0 million promissory note receivable due in October 2011.
Changes, outlook and risks
- Management attributed improved sales primarily to higher customer order rates amid improving North American conditions. Late in Q2, however, orders were flat, and management said it was uncertain whether growth would resume or sales would remain flat.
- The precision-slide facility consolidation—moving production from Michigan to facilities in Canada and Taiwan—was completed in April. Management expects efficiency benefits, but reported relocation costs and production inefficiencies weighed on 2011 results.
- Key pressures include raw-material costs: steel, brass, alloyed zinc and stainless steel together represented about 17% of cost of goods sold, and their costs were 14%–22% higher in the first half than in 2010. Management said passing increases through to customers may be difficult.
- Currency movements also pressured operating income. Management expected the U.S. dollar to remain weak relative to the Canadian and New Taiwan dollars, likely affecting 2011 results negatively; hedging may only partly offset the impact.
- A patent dispute was settled in March 2011: the competitor paid CompX’s Canadian subsidiary approximately $7.5 million, and the parties cross-licensed patents and withdrew certain proceedings. Management did not expect significant future expense related to those claims; it said other claims and disputes were not expected to have a material long-term adverse effect.
- After quarter-end, CompX acquired an ergonomic component products business for approximately $5 million cash, with up to $1.5 million additional contingent consideration. It also borrowed approximately $5 million under its revolving facility for the acquisition. At June 30, no revolving-facility balance was outstanding; the $37.5 million facility matured in January 2012, and CompX reported covenant compliance and available borrowing capacity at quarter-end.
- Management believed operating cash flow and cash on hand would cover working capital, capital expenditures, debt service and dividends for the next 12 months and five years, while cautioning that weaker-than-expected results could adversely affect liquidity. Other cited risks include demand, competition, costs, foreign exchange, acquisitions, litigation, taxes, regulation and operating interruptions. No material risk-factor changes were reported for the first half.
Important facts for investors to verify
- How much of first-half operating income and net income reflects the one-time settlement gain and associated tax effects, versus underlying operations.
- Whether the facility consolidation delivers expected savings and whether Furniture Components inventory, which rose to 73 days from 58 days at year-end, normalizes.
- Whether customer orders recover from the late-Q2 flat trend and whether higher raw-material costs can be offset or passed through.
- Collection and timing of the $15 million note receivable due in October 2011, liquidity after the post-quarter acquisition and borrowing, and refinancing or renewal plans for the January 2012 credit-facility maturity.
- Integration and performance of the acquired business, including the conditions for the additional contingent payment.