CompX International Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013 unless noted. CompX manufactures security products and recreational marine components. It is approximately 87% owned by NL Industries, with ultimate control associated with Contran and related family interests.
Financial results
| Metric | Q1 2013 | Q1 2014 |
|---|---|---|
| Net sales | $21.453 million | $25.781 million |
| Gross profit / margin | $6.020 million / 28.1% | $7.749 million / 30.1% |
| Operating income / margin | $1.434 million / 6.7% | $3.288 million / 12.8% |
| Net income | $0.895 million | $2.140 million |
| Diluted earnings per share | $0.07 | $0.17 |
| Operating cash flow | $(14.640) million | $(2.338) million |
| Capital expenditures | $0.663 million | $0.747 million |
Sales rose approximately 20%, net income increased approximately 139%, and operating income increased approximately 129%. Management attributed the operating improvement principally to higher volumes and better absorption of fixed manufacturing costs; operating expenses also declined slightly. The effective tax provision was approximately 35% in Q1 2014.
Segments
- Security Products: Sales increased 21% to $22.964 million and operating income rose 47% to $4.699 million. Growth included new products for an existing government customer, transportation demand, and two electronic-lock project installations.
- Marine Components: Sales increased 14% to $2.817 million. The operating loss narrowed to $0.016 million from $0.110 million, with improved fixed-cost leverage on higher volume.
Liquidity, debt, and cash flows
Cash and cash equivalents were $35.049 million at March 31, 2014, down $3.704 million from year-end 2013. Current assets were $65.869 million and current liabilities were $10.721 million. The balance sheet reports no debt at March 31, 2014, and the company recorded no interest expense in Q1 2014.
Operating cash use improved by $12.302 million year over year, mainly because cash taxes paid were lower by approximately $11.9 million; the prior-year period included tax payments related to a previously reported asset-sale gain. In Q1 2014, higher receivables and inventory contributed to working-capital use. Investing cash use was $0.747 million, all reported as capital expenditures. Financing cash use was $0.619 million, reflecting dividends; the prior-year period also included debt repayment and proceeds from a note collection and asset sale.
The quarterly dividend was $0.05 per share in Q1 2014, compared with $0.125 in Q1 2013; management said the regular dividend was reduced beginning in Q2 2013. Firm capital-project purchase commitments were $0.628 million.
Outlook, risks, and other developments
- Management said Q1’s robust demand should not be taken as the full-year sales trend because of one-time projects and customer seasonality. It described demand signals across served markets as positive, while noting it could not attribute current sales to clear overall North American economic growth. No quantified earnings or revenue guidance was provided.
- Commodity-cost volatility is expected to continue. Zinc, brass, and stainless steel together represented approximately 11% of cost of goods sold. CompX may not be able to offset or pass through cost increases without margin pressure.
- Other identified risks include product demand, competition and pricing, new-product development, litigation, environmental and regulatory matters, tax outcomes, operating interruptions, and economic conditions. The filing reported no material change in risk factors or contractual obligations from the 2013 Annual Report.
- CompX implemented a new ERP system covering financial, production, and logistics processes during Q1. Management stated that appropriate financial-reporting controls were maintained; the CEO and CFO concluded disclosure controls were effective as of March 31, 2014.
- The interim statements include only normal recurring adjustments; management cautioned that Q1 results may not indicate full-year results.
Important facts for investors to verify
- Whether Q1 sales growth—particularly government-customer, transportation, and special electronic-lock projects—continues beyond seasonal and one-time demand.
- Whether higher receivables and inventory convert into cash; operating cash flow remained negative despite stronger earnings.
- Whether higher production volumes and improved fixed-cost absorption sustain the gross- and operating-margin gains.
- How commodity-price changes and competitive limits on price increases affect margins.
- Whether the ERP implementation proceeds without disruption and whether liquidity and dividend policy remain consistent with operating cash generation.