CompX International Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Amounts below are in millions of dollars, except per-share data. CompX manufactures security products and recreational marine components; it is approximately 86% owned by NL Industries.
Financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $28.4 | $29.7 | $84.5 | $94.6 |
| Gross margin | $7.3 (25.8%) | $9.5 (31.9%) | $25.1 (29.7%) | $30.0 (31.8%) |
| Operating income | $2.1 (7.3%) | $4.3 (14.4%) | $9.5 (11.2%) | $14.2 (15.0%) |
| Net income | $1.8 | $3.9 | $8.2 | $12.8 |
| Basic and diluted EPS | $0.15 | $0.31 | $0.66 | $1.03 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $9.2 | $12.5 |
At September 30, 2020, cash and equivalents were $65.1 million, versus $63.3 million at year-end 2019. Total assets were $182.0 million; current assets were $97.8 million and current liabilities $11.7 million. The filing reports no debt balance. Stockholders’ equity was $166.7 million. Nine-month capital expenditures were $1.3 million, and dividends paid were $3.7 million. CompX held a $30.5 million unsecured demand note receivable from affiliate Valhi; the note bears interest at prime plus 1% and principal is due on demand, but no earlier than December 31, 2021.
Material changes and segment performance
- Q3 sales declined 4% year over year; nine-month sales declined 11%. Operating income fell 51% in Q3 and 33% for the nine-month period.
- Security Products sales were $21.2 million in Q3, down 9%, and $65.3 million year to date, down 13%. Segment operating income declined 43% in Q3 and 26% year to date. Weaker transportation, distribution and office-furniture demand weighed on results.
- Marine Components sales rose 15% in Q3 to $7.2 million, principally from towboat demand, but fell 1% to $19.3 million for the nine-month period. Segment operating income rose 8% in Q3 and declined 7% year to date.
- Lower production volumes in Q2 increased fixed cost per unit and the carrying value of inventory subsequently sold in Q3. This, along with higher medical costs in Security Products, reduced gross margins. Consolidated Q3 gross margin fell to 25.8% from 31.9%.
Outlook, risks and unusual items
Management said sales recovered from Q2’s unusually low levels, particularly in Marine, but remained generally below pre-pandemic expectations. It expected 2020 revenue and operating income to be below 2019, with operating income for the rest of 2020 remaining below comparable prior-year periods. Management expected Marine strength and slower recovery in transportation, distribution and office furniture to continue through year-end. It reported largely intact supply chains and minimal disruptions, while noting possible facility closures and continued uncertainty from COVID-19, customer demand, and potential renewed restrictions.
Management considered cash on hand, operating cash flow and access to external financing sufficient for liquidity needs over the next 12 months and five years. Capital spending was limited to customer-demand and maintenance needs; $0.2 million of capital-project purchase commitments remained at quarter-end. The quarterly dividend increased from $0.07 to $0.10 per share beginning in Q1 2020; future dividends remain discretionary. The filing reported no material change in contractual obligations, no off-balance-sheet financing arrangements, and no material tax effect from the CARES Act. COVID-19, raw-material prices, competition, customer demand, operations interruptions, litigation, environmental matters and tax outcomes are among the disclosed risks.
Important facts for investors to verify
- Whether COVID-related customer demand and production levels recover as management anticipated, especially in Security Products’ transportation, distribution and office-furniture markets.
- Whether margins improve as higher-cost inventory produced during low-volume quarters is sold through.
- Credit and collection exposure associated with the $30.5 million affiliate note receivable from Valhi, including its demand terms and related-party nature.
- Future cash generation, capital spending and the board’s decisions on dividend amounts and timing.