CompX International Inc. — Q3 2011 Form 10-Q
Business and period: CompX manufactures security products, furniture components, and marine components. This unaudited report covers the three and nine months ended September 30, 2011; year-to-date comparisons are against the same 2010 period. CompX was 87% owned by NL Industries.
Financial results
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $35.7m | $35.7m | $105.8m | $102.9m |
| Gross profit / margin | $8.5m / 23.9% | $9.7m / 27.1% | $27.1m / 25.6% | $27.7m / 26.9% |
| Operating income / margin | $1.5m / 4.1% | $3.1m / 8.8% | $13.4m / 12.6% | $7.8m / 7.6% |
| Net income | $1.1m | $1.7m | $6.7m | $2.4m |
| Basic and diluted EPS | $0.09 | $0.13 | $0.54 | $0.20 |
| Operating cash flow | Not separately reported for the quarter | $8.3m | $5.8m |
Cash and liquidity: Cash was $8.5m at September 30, down from $13.9m at December 31, 2010. Current assets were $63.8m and current liabilities $23.4m. The balance sheet included a $15.0m promissory note receivable, collected in October 2011.
Debt: Total debt was $42.3m at September 30, comprising $4.8m drawn on a $37.5m revolving facility and $37.5m owed to an affiliate; $5.8m was classified as current. In October, after collecting the $15.0m note receivable, CompX prepaid $15.0m on the affiliate note. The revolving facility expires in January 2012; management expected to renew it. The company reported compliance with financial covenants and available borrowing capacity at quarter-end.
Changes and operating drivers
- Q3 sales were essentially unchanged year over year, while nine-month sales rose 3%, reflecting stronger customer orders mainly in the first half and particularly in Security Products.
- Q3 operating income fell 53%. Management cited less favorable product mix, higher raw-material costs, and $1.1m of held-for-sale asset write-downs, versus $0.5m a year earlier.
- Nine-month operating income rose 71%, substantially reflecting a $7.5m patent litigation settlement gain and lower litigation expense. Results also included $2.0m of facility consolidation costs and $1.1m of asset write-downs.
- Q3 Furniture Components sales declined 3% and gross margin fell to 16% from 23%, affected by currency, lower ergonomic-product sales, and steel costs. The segment’s nine-month operating income included the settlement gain and restructuring costs; excluding those items, management said its operating margin declined year over year.
- Security Products nine-month sales rose 5%; Marine Components sales rose 3%. Marine remained loss-making at the operating level, though its nine-month operating loss narrowed to $0.7m from $0.8m.
Cash flow, capital allocation, and unusual items
- Nine-month operating cash flow was $8.3m. Investing used $6.5m, including $4.9m for the July acquisition and $1.8m of capital expenditures. Financing used $6.9m, including $4.6m of dividends and debt repayments, partly offset by new borrowing.
- In July, CompX acquired a Canadian ergonomic component-products business for approximately $4.9m net cash consideration, with up to approximately $1.5m of additional contingent consideration tied to 2012 sales targets. The acquired business contributed about $0.6m of Q3 sales; its pro forma effect was described as immaterial.
- The company settled patent litigation in March 2011: the competitor paid CompX’s Canadian subsidiary approximately $7.5m, and the parties cross-licensed patents and withdrew certain proceedings. A $2.1m deferred tax provision was recognized on the gain.
- A restructuring shifted precision-slide production from Byron Center, Michigan, to Kitchener, Ontario, and Taipei, Taiwan. The move was substantially complete by April; approximately $2.0m of relocation costs and $0.2m of severance had been expensed, with no further such costs expected. CompX decided to sell the Byron Center facility and recorded a $0.9m write-down; a separate property write-down was $0.2m.
Outlook, risks, and contingencies
Management said customer orders had been flat from the latter part of Q2 through Q3 and that a return to sales growth over the following months was uncertain. It expected lean-manufacturing and facility-consolidation initiatives to improve efficiency, and said staffing would be adjusted where possible to match demand. No quantified earnings or revenue guidance was provided. Management believed cash, operating cash flow, and financing access would meet liquidity needs for the next 12 months and five years, subject to actual results and developments.
Raw materials including steel, brass, alloyed zinc, and stainless steel represented about 17% of cost of goods sold; their costs were 14% to 24% higher in the first nine months than a year earlier. Management warned that competitive conditions may limit price recovery and that surcharges can pressure margin percentages. Currency movements also pose risk: management expected exchange rates to likely weigh on 2011 results versus 2010, while noting that hedges cannot fully offset currency effects. At September 30, forward contracts to exchange U.S. $22.4m for Canadian dollars had a $0.7m liability and matured through December 2012.
CompX said it could not predict when the three held-for-sale properties would be disposed of given commercial real-estate conditions. It considered other claims and disputes not likely to have a material long-term adverse effect. The filing identified demand, raw-material costs, competition, currency, acquisitions, litigation, taxes, credit-facility covenants, economic conditions, regulation, and operational interruptions among key risks. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the January 2012 revolving credit facility was renewed and on what terms.
- Completion and accounting impact of the October $15.0m affiliate-note prepayment, including remaining debt and liquidity.
- Whether demand, raw-material costs, and currency movements developed as management anticipated, and their effect on margins.
- Final purchase-price allocation and any contingent consideration for the July acquisition.
- Timing and proceeds from sale of the held-for-sale properties, and whether further write-downs were required.
- Future dividend decisions and the impact of the one-time litigation settlement gain on comparisons with recurring operating performance.