CompX International Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011 (52 weeks); comparisons are with FY2010 unless noted. The filing was signed March 2, 2012. CompX manufactures security products, furniture components and marine components.
Financial performance
| Metric | FY2011 | FY2010 |
|---|---|---|
| Net sales | $138.8 million | $135.3 million |
| Gross profit / margin | $35.2 million / 25% | $36.0 million / 27% |
| Operating income / margin | $15.5 million / 11% | $9.3 million / 7% |
| Net income | $7.7 million | $3.1 million |
| Diluted EPS | $0.62 | $0.25 |
| Operating cash flow | $16.0 million | $13.0 million |
| Cash and cash equivalents at year-end | $10.1 million | $13.9 million |
| Total debt, including current maturities | $24.2 million | $45.2 million |
FY2011 sales rose 3%, while gross profit declined 2% and gross margin fell two percentage points. Operating income benefited materially from a $7.5 million patent-litigation settlement gain and lower litigation expense; it also absorbed $2.0 million of facility-consolidation costs and $1.1 million of asset write-downs. Net income included $7.4 million of income-tax expense.
Fourth-quarter results
For the quarter ended December 31, 2011, sales were $33.1 million versus $32.3 million in Q4 2010; gross profit was $8.1 million versus $8.3 million; operating income was $2.1 million versus $1.5 million; net income was $1.0 million versus $0.6 million; and diluted EPS was $0.08 versus $0.05.
Segments and changes versus prior year
- Security Products: Sales increased 5% to $71.4 million and operating income rose 10% to $14.4 million, supported by improved customer orders, especially in leisure transportation, and better fixed-cost absorption.
- Furniture Components: Sales were essentially flat at $59.0 million. Operating income was $9.1 million, including the $7.5 million settlement gain. Excluding the settlement, litigation expenses and consolidation costs, management said the operating margin declined four percentage points, principally from weaker gross margin, facility-transition inefficiencies and currency effects. A July acquisition contributed $1.9 million of 2011 sales.
- Marine Components: Sales increased 4% to $8.4 million, but the segment remained loss-making, with a $1.2 million operating loss.
FY2010 had shown a strong rebound from FY2009’s $116.1 million sales and $4.0 million operating loss. FY2011 continued sales growth but at a slower rate; improved operating income included a significant one-time settlement benefit.
Cash, debt and liquidity
- Operating cash flow was $16.0 million. Investing activities provided $7.2 million, mainly reflecting collection of a $15.0 million note receivable, partly offset by the $4.8 million acquisition and $3.2 million of capital expenditures. Financing activities used $26.7 million, including $20.0 million of affiliate-note repayments and $6.2 million of dividends.
- Year-end debt consisted of a $22.2 million variable-rate note payable to affiliate and $2.0 million drawn on the revolving facility. The affiliate note bears interest at 1.4% at year-end and matures in 2014. The facility rate was 4.4% at year-end.
- In January 2012, the revolving credit facility was amended, extended to January 2015 and reduced from $37.5 million to $30.0 million. The company reported approximately $28.0 million available under the amended facility and compliance with financial covenants at December 31, 2011.
- Management stated that cash on hand and operating cash flow should cover working capital, capital expenditures, debt service and declared dividends for the next 12 months and obligations for the next five years. Planned 2012 capital expenditures were approximately $6.2 million, including a new manufacturing and accounting system.
Outlook, risks and unusual items
- Management described demand as uncertain: Security Products had improved, while Furniture Components faced softer appliance and office-furniture orders and fewer government-related projects. The filing provides no specific earnings or sales guidance for 2012.
- Management expected commodity raw-material prices to rise in 2012; these materials represented approximately 18% of cost of sales. The company warned that competition may limit its ability to pass cost increases through to customers.
- Management expected a weaker U.S. dollar versus the Canadian and New Taiwan dollars to weigh on 2012 results; currency hedges may mitigate, but not eliminate, the effect.
- The office-furniture market represented 32% of 2011 sales. The ten largest customers represented 37%, although no single customer exceeded 10%. Other risks include intense price competition, economic and demand volatility, acquisition execution, and potential impairment of assets if projected cash flows weaken.
- The $7.5 million patent settlement was received in cash in 2011; the parties cross-licensed certain patents and withdrew specified proceedings. Management did not expect significant related litigation expense going forward. The company also recorded $1.1 million of write-downs on properties held for sale; additional reductions may be required if sale prices disappoint.
- The July 2011 acquisition included possible additional consideration of up to approximately $1.5 million, contingent on 2012 sales targets. Environmental and other claims were described as not expected to have a material adverse effect. The filing also notes joint and several federal tax-group liability, with NL agreeing to indemnify CompX for amounts exceeding its allocated tax liability.
Key facts for investors to verify
- How much of FY2011 operating income and earnings growth is sustainable apart from the litigation settlement and reduced legal expense?
- Whether Furniture Components demand, facility-consolidation efficiency and acquired-business sales meet management’s expectations.
- Progress on the $6.2 million 2012 capital program and implementation of the new systems.
- Raw-material and foreign-exchange trends, including the effectiveness and exposure of the currency hedges.
- Debt repayment, covenant headroom, affiliate-related obligations and the contingent acquisition payment.
- Timing and proceeds from sales of held-for-sale properties, and whether further write-downs or impairment charges arise.
- Dividend capacity: the facility limits dividends to $0.125 per share per quarter and $8.0 million in aggregate per calendar year; future payments remain discretionary.