CompX International Inc. — Q1 2023 Form 10-Q
Business and period. CompX manufactures security locks and related products, and recreational marine components. This report compares the three months ended March 31, 2023 and 2022; the company notes its actual 2023 quarter ended April 2, 2023. Results are unaudited. CompX was approximately 87% owned by NL Industries at quarter-end.
Financial results
| Metric | Q1 2022 | Q1 2023 |
|---|---|---|
| Net sales | $42.05 million | $41.15 million |
| Gross margin | $12.08 million; 28.7% of sales | $12.70 million; 30.9% of sales |
| Operating income | $6.31 million; 15.0% of sales | $7.04 million; 17.1% of sales |
| Interest income | $0.21 million | $0.95 million |
| Net income | $4.98 million | $6.07 million |
| Diluted EPS | $0.40 | $0.49 |
| Operating cash flow | $(2.16) million | $3.07 million |
Net sales declined 2%, while net income rose 22%. Cost of sales fell to 69.1% of sales from 71.3%, lifting gross margin rate by 2.2 percentage points. The effective tax provision was $1.92 million in 2023 versus $1.54 million in 2022.
Segments
- Security Products: Sales decreased 8% to $27.34 million and operating income fell 10% to $5.38 million. Lower sales to government security and healthcare markets drove the decline; segment gross and operating margin rates were described as comparable with the prior year.
- Marine Components: Sales increased 11% to $13.81 million and operating income rose 65% to $3.32 million. Gross margin rate increased to 30.7% from 24.1%, reflecting favorable product mix, price increases and surcharges, and improved production efficiencies.
Financial position and liquidity
At March 31, 2023, cash and cash equivalents were $17.99 million and marketable securities were $42.96 million, totaling approximately $60.95 million. Total current assets were $111.82 million and current liabilities were $13.07 million. Total liabilities were $15.09 million; the balance sheet reports no debt. Stockholders’ equity was $161.40 million.
Operating cash flow improved by $5.23 million year over year, primarily due to more favorable working-capital changes and higher operating income. Investing activities used $8.75 million, including $13.48 million of Treasury-security purchases, partly offset by $4.00 million of maturities and net collections of $1.00 million on the affiliate note. Capital expenditures were $0.27 million. The company paid $3.08 million in dividends, or $0.25 per share. Cash declined by $8.76 million during the quarter, largely alongside increased marketable securities.
CompX held a $12.2 million unsecured demand note receivable from Valhi, bearing interest at prime plus 1%; CompX had discretion over further advances. Management stated cash, operating cash flow and financing access should meet liquidity needs for the next 12 months and five years. Expected 2023 capital expenditures were approximately $2.5 million; firm commitments for projects in process were $0.1 million.
Outlook, risks and other notable items
Management expects lower 2023 net sales and operating income at both segments than in 2022, citing softening North American demand. Reduced order rates are expected to continue through Q2. Security Products margins may be pressured by higher-cost inventory and limited ability to implement further price increases. Marine Components sales are expected to decline as higher interest rates and reduced boat-production schedules weigh on demand; full-year segment gross margin percentage is expected to be comparable with 2022. These are qualitative expectations; the filing gives no quantified earnings or sales guidance.
Management reported generally stabilized raw-material prices, more favorable labor markets, stable supply chains and minimal transportation delays, but continued shortages of certain electronic components. Risks include demand and economic conditions, raw-material and other cost changes, competition, supply-chain or operating disruptions, geopolitical events, regulation, litigation, intellectual-property protection and tax matters. The filing reports no material change in contractual obligations or market risks from the 2022 Annual Report, and no material change in internal control over financial reporting. Disclosure controls were deemed effective.
The company recorded a $30,000 unrealized loss on marketable securities in other comprehensive income. No share repurchases occurred in the quarter; 523,647 shares remained authorized for repurchase. Future dividends are discretionary. CompX’s affiliate relationships and ownership structure are significant: Valhi controlled NL, which owned approximately 87% of CompX.
Investor facts to verify
- Whether order-rate weakness continues and how it affects both segments’ sales and operating income.
- Whether Security Products’ higher-cost inventory and Marine Components’ product mix affect margins as management expects.
- The extent and credit exposure of the unsecured Valhi note, including the affiliate relationship and CompX’s ability to call for repayment.
- Whether the $60.95 million cash-and-securities balance and operating cash flow remain sufficient amid dividends, capital spending and any affiliate lending.
- Any developments in electronic-component shortages, customer production cuts, raw-material costs or other risks that could change the outlook.