CompX International Inc. — FY 2022 Form 10-K
Reporting period: Fiscal year presented as ended December 31, 2022; the actual fiscal year-end was January 1, 2023. The year comprised 52 weeks. The filing was dated March 1, 2023.
Business context
CompX manufactures engineered security products and recreational marine components through two segments: Security Products and Marine Components. NL Industries owned approximately 87% of CompX at year-end. The filing reports substantial customer concentration: the ten largest customers generated 52% of 2022 sales; the U.S. Postal Service represented 14% and Malibu Boats 12%.
Financial performance and liquidity
| Metric | 2022 | 2021 |
|---|---|---|
| Net sales | $166.6 million | $140.8 million |
| Gross margin | $48.8 million; 29.3% | $42.7 million; 30.3% |
| Operating income | $25.4 million; 15.3% | $20.5 million; 14.6% |
| Net income | $20.9 million | $16.6 million |
| Diluted earnings per share | $1.69 | $1.34 |
| Cash from operating activities | $16.9 million | $10.5 million |
| Capital expenditures | $3.7 million | $4.1 million |
Sales rose 18% and operating income 24% year over year. Marine Components sales increased 46% to $52.0 million and operating income rose 71% to $9.6 million, driven mainly by towboat demand. Security Products sales grew 9% to $114.5 million, while operating income increased 5% to $22.7 million.
Gross margin declined year over year, primarily because Security Products’ higher-cost inventory flowed through cost of sales and price increases and surcharges did not fully offset costs. Consolidated net income increased approximately 26%.
At year-end, cash and cash equivalents were $26.7 million and marketable securities were $33.1 million, for combined cash and securities of $59.9 million. Current assets were $111.2 million and current liabilities $16.7 million. The balance sheet reports no borrowings; it includes $2.2 million of deferred tax liabilities and other noncurrent liabilities. CompX held a $13.2 million note receivable from affiliate Valhi, bearing interest at prime plus 1.0% (8.5% at year-end), with principal due on demand but not before December 31, 2024.
Cash declined $49.8 million during 2022, primarily reflecting $33.0 million of marketable-security purchases, $33.9 million of dividends paid (including a $1.75-per-share special dividend), and $1.7 million of share repurchases. Regular dividends totaled $1.00 per share for 2022. The board declared a $0.25-per-share first-quarter 2023 dividend. Management expects 2023 capital expenditures of approximately $3.0 million.
Outlook, risks and notable matters
- Management expects lower net sales and operating income in both segments in 2023 versus 2022. Orders and backlog softened late in 2022; management cited weaker North American demand and general economic conditions.
- Marine Components sales were expected to remain strong in the first quarter, then decline versus 2022 as higher interest rates and boat manufacturers’ reduced production schedules weigh on demand. Management expected Marine Components’ 2023 gross-margin percentage to be comparable to 2022.
- Security Products margins are expected to remain pressured as higher-cost inventory continues to move through cost of sales and weaker demand may constrain further price increases. Management expected raw-material prices to remain relatively stable in 2023, but at elevated levels.
- Labor costs remain elevated; shortages of certain electronic components persist, although management described supply chains as generally stable and recent transport delays as minimal. Inventory increased to $31.3 million from $25.6 million, and consolidated days in inventory rose to 99 from 96.
- Key risks include competition and pricing pressure, commodity-cost volatility, customer and supplier concentration, supply disruptions, cybersecurity incidents, climate-related costs or disruption, and uncertain demand. The company reported prior cyberattacks but no material losses from system breaches to date.
- CompX is party to routine legal and environmental matters and considers their aggregate outcome unlikely to materially adversely affect its financial condition, results or liquidity. Purchase obligations totaled $17.7 million, primarily for materials and capital projects. CompX is jointly and severally liable for federal income-tax liabilities of its Contran tax group for applicable periods; NL agreed to indemnify CompX for amounts exceeding its tax-sharing-agreement liability.
- Goodwill was $23.7 million, all in Security Products. Management used a qualitative annual impairment assessment and concluded no quantitative test was needed; the auditor identified this assessment as a critical audit matter. No impairment was recorded.
- The financial statements received an unqualified audit opinion. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not attest to internal-control effectiveness.
Important facts for investors to verify
- Whether the anticipated 2023 sales and operating-income declines materialized, especially in Marine Components and the towboat market.
- Whether Security Products recovered margins as higher-cost inventory cleared and whether pricing kept pace with costs.
- Inventory levels, order/backlog trends, and customer concentration, including dependence on the U.S. Postal Service and Malibu Boats.
- Liquidity and capital allocation: dividends, share repurchases, capital spending, and the $13.2 million related-party loan to Valhi, including its collectability and terms.
- The assumptions supporting the $23.7 million Security Products goodwill valuation, particularly if demand or profitability weakens.
- Related-party arrangements, including shared services, group insurance, tax-sharing obligations, and potential controlling-stockholder influence.