CompX International Inc. — 2020 Form 10-K Summary
Reporting period: Fiscal year presented as ended December 31, 2020; the actual year-end was January 3, 2021. The year comprised 53 weeks, versus 52 weeks in 2019. This annual filing also reports fourth-quarter results.
Business context
CompX manufactures security products, including cabinet locks and electronic locking systems, and marine components, including exhaust systems, gauges, controls, wake enhancement systems and trim tabs. Its two reportable segments are Security Products and Marine Components. NL Industries owned approximately 86% of CompX at year-end.
Financial performance and liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Net sales | $114.5 million | $124.2 million |
| Gross margin | $32.8 million; 28.7% of sales | $39.0 million; 31.4% of sales |
| Operating income | $11.8 million; 10.3% of sales | $17.7 million; 14.2% of sales |
| Interest income | $1.7 million | $3.3 million |
| Net income | $10.3 million | $16.0 million |
| Diluted EPS | $0.83 | $1.29 |
| Cash from operating activities | $15.5 million | $18.5 million |
| Capital expenditures | $1.7 million | $3.2 million |
| Cash and cash equivalents at year-end | $70.6 million | $63.3 million |
At year-end, current assets were $101.2 million and current liabilities were $13.2 million. The balance sheet reports no borrowings. CompX held a $29.5 million note receivable from affiliate Valhi, bearing interest at prime plus 1.0%; principal is due on demand, but not before December 31, 2022. Interest income from the note was $1.5 million in 2020. Dividends paid were $5.0 million, or $0.40 per share. The board declared a $0.20-per-share first-quarter 2021 dividend.
Material changes and fourth-quarter results
- Annual sales fell 8% and operating income fell 33% from 2019. COVID-19-related customer shipment delays and reduced demand were most pronounced in the second quarter.
- Security Products sales declined 12% to $87.9 million, and segment operating income declined 29% to $14.9 million. Lower volumes, higher per-unit production costs on inventory made during low-output quarters, and a $2.1 million increase in employer-paid medical costs weighed on margins.
- Marine Components sales rose 7% to $26.7 million and operating income increased 12% to $4.1 million, supported by towboat-market demand, particularly for wake enhancement systems and surf pipes.
- Fourth-quarter 2020 sales were $30.0 million, operating income $2.3 million, net income $2.1 million and diluted EPS $0.17. The comparable 2019 quarter had sales of $29.6 million, operating income of $3.5 million, net income of $3.2 million and diluted EPS of $0.26.
- Cash from operations declined by $3.0 million year over year, primarily reflecting lower operating income, partly offset by lower tax payments and favorable working-capital changes. Cash increased by $7.4 million during 2020.
Outlook, risks and other notable items
- Management expected 2021 revenue and operating income to increase versus 2020, but did not expect Security Products to return to 2019 pre-pandemic levels. It anticipated continued margin pressure in that segment from higher fixed costs per unit while production volumes remained below 2019.
- Management expected recreational marine demand trends to continue at least in early 2021. It estimated 2021 capital expenditures of approximately $4.0 million, funded from cash on hand and operating cash flow, and expected the 2021 effective tax rate to be comparable to 2020’s 24%.
- COVID-19 remains a material uncertainty: future results depend on customer demand and operations, the broader economic recovery, and possible disruptions or temporary facility closures. The Illinois facility closed for one week in the second quarter of 2020; management reported minimal supply-chain disruption to date.
- Other risks include competitive pricing pressure, raw-material price and availability changes, customer concentration, labor and operating costs, intellectual-property claims, environmental regulation, cyber incidents, and general economic conditions. One customer, the U.S. Postal Service, represented 17% of 2020 sales; the ten largest customers represented 48%.
- Related-party exposure is significant: CompX lends to Valhi and receives management and other services through affiliated arrangements. CompX is also part of the Contran consolidated tax group and is jointly and severally liable for group federal taxes for periods of membership; NL has agreed to indemnify CompX for amounts exceeding its tax-sharing-agreement liability.
- Goodwill was $23.7 million, all assigned to Security Products. Management used a qualitative annual impairment assessment and found no impairment; the auditor identified this assessment as a critical audit matter. No material adverse effect was expected from the disclosed legal claims, and management reported substantial environmental-law compliance.
Important facts for investors to verify
- Whether the projected 2021 recovery materialized, especially in Security Products and its transportation, office-furniture and distribution markets.
- Whether segment margins recover as production volumes improve and the higher-cost inventory made during 2020 is worked through.
- The credit, demand-repayment terms and ongoing balance of the $29.5 million Valhi affiliate note, as well as related-party service, insurance and tax arrangements.
- Customer concentration—particularly the U.S. Postal Service’s 17% share of sales—and any material changes in major-customer demand.
- Cash generation, the planned increase in capital expenditures, and the board’s future dividend decisions.
- The assumptions supporting the Security Products goodwill assessment and any indicators that could require a quantitative test or impairment charge.