CompX International Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017 (52 weeks). The filing also reports unaudited quarterly results. CompX manufactures security products and recreational marine components through its Security Products and Marine Components segments.
Financial performance and liquidity
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net sales | $112.0 million | $108.9 million | Up 3% |
| Gross profit / gross margin | $34.8 million / 31.1% | $35.2 million / 32.2% | Profit down 1%; margin down 1.1 percentage points |
| Operating income / margin | $15.2 million / 13.6% | $15.6 million / 14.3% | Down 2%; margin down 0.7 percentage points |
| Net income | $13.2 million | $10.5 million | Up 26% |
| Diluted earnings per share | $1.06 | $0.84 | Up 26% |
| Cash provided by operating activities | $12.6 million | $13.9 million | Down $1.3 million |
Net income benefited from a non-cash $1.9 million deferred tax benefit following enactment of the 2017 Tax Act. The reported effective tax rate was 23%, versus 35% in 2016. The company expects an approximately 25% effective tax rate in 2018; its tax-reform accounting was provisional and subject to adjustment.
At year-end, cash and cash equivalents were $29.7 million, current assets $56.4 million, current liabilities $11.3 million, total assets $151.0 million and stockholders’ equity $136.6 million. Current assets were about 5.0 times current liabilities. No conventional borrowings are reported in the supplied financial statements. CompX had a $38.2 million receivable from affiliate Valhi under a $40 million unsecured revolving demand note, bearing interest at prime plus 1%; principal is due on demand, but no earlier than December 31, 2019.
Capital expenditures were $2.8 million in 2017; approximately $3.8 million was forecast for 2018. The company paid $0.20 per share in dividends during 2017 and declared a $0.05-per-share first-quarter 2018 dividend. Management believes cash and operating cash flows will cover working capital, capital spending, debt service and dividends for the next 12 months and obligations for the next five years.
Material changes and segment results
- Security Products sales rose 2% to $96.6 million, while operating income declined 4% to $19.2 million. Government security and electronic-lock demand increased, partly offset by lower recreational-transportation sales to a customer.
- Marine Components sales rose 8% to $15.4 million, supported by demand in the waterski/wakeboard boat market. Operating income fell 21% to $1.3 million as product mix, manufacturing costs and personnel turnover weighed on margins.
- Higher zinc and brass prices, unfavorable customer and product mix, increased employee medical costs, and higher Marine manufacturing costs reduced gross margin. Zinc purchase costs late in 2017 were over 50% above two years earlier; rising zinc and brass prices increased 2017 aggregate purchase costs by about $0.5 million.
- Interest income increased to $1.9 million, principally because of the larger average Valhi loan balance and, to a lesser extent, higher rates.
- Cash declined $3.5 million during 2017, reflecting investing outflows that included net advances to Valhi. Operating cash flow fell partly because of higher cash taxes and working-capital movements.
For the fourth quarter, sales were $25.1 million versus $26.3 million a year earlier, operating income was $2.7 million versus $4.0 million, and net income was $4.3 million versus $2.9 million. The fourth-quarter net-income increase occurred alongside lower sales and operating income and reflects the annual tax-reform benefit; the filing’s quarterly table does not separately allocate that benefit by quarter.
Outlook, risks and other notable matters
Management aims to grow 2018 sales and profitability, citing positive momentum in both segments, improving economic conditions, product innovation and diversification. It expected weaker recreational-transportation customer sales to continue into 2018, and planned to manage demand changes through staffing reviews, lean manufacturing and cost-improvement efforts. Raw-material markets were expected to stabilize, though stronger economic conditions could raise input costs.
- Demand, customer concentration and competition are significant risks: the U.S. Postal Service represented 16% of 2017 sales and the ten largest customers represented 44%.
- Commodity price increases may pressure margins; the company has no commodity hedging program and may be unable to pass higher costs to customers.
- Other disclosed risks include new-product execution, intellectual-property claims, environmental and regulatory costs, cyber incidents, operating interruptions, and general economic and political conditions.
- CompX is controlled through NL Industries, which owned 87% of its common stock. Related-party arrangements include the Valhi loan, shared services and group insurance. The loan balance was close to its $40 million commitment limit.
- Legal matters were described as incidental to business, with management not expecting their disposition to have a material adverse effect. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements.
Investor verification priorities
- Review the Valhi note’s terms, credit exposure, repayment prospects and effect on CompX’s available liquidity.
- Assess how much 2017 earnings growth depended on the one-time, non-cash tax benefit and verify final tax-reform adjustments.
- Track customer concentration and demand trends, especially USPS, government security, electronic locks and recreational transportation.
- Monitor gross-margin recovery against zinc and brass costs, product mix, employee medical costs and Marine manufacturing efficiency.
- Compare 2018 capital spending, cash generation and dividends with management’s outlook and confirm whether the declared dividend was paid.