CompX International Inc. — Q3 2016 Form 10-Q
Business and period: CompX manufactures security products, including locks, and recreational marine components. This unaudited report covers the quarter and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods. CompX is 87% owned by NL Industries.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $28.4 million | $26.5 million | $82.6 million | $83.3 million |
| Gross profit | $9.4 million | $8.1 million | $26.1 million | $25.8 million |
| Gross margin | 33.1% | 30.6% | 31.6% | 31.0% |
| Operating income | $4.5 million | $3.4 million | $11.5 million | $11.4 million |
| Operating margin | 15.7% | 13.0% | 14.0% | 13.7% |
| Net income | $3.0 million | $2.2 million | $7.6 million | $7.5 million |
| Diluted EPS | $0.24 | $0.18 | $0.61 | $0.60 |
Cash flow and liquidity: Nine-month operating cash flow was $7.9 million, versus $6.7 million in 2015. Capital expenditures were $2.3 million; dividends paid were $1.9 million. Investing activities used $13.0 million, principally reflecting net advances to Valhi. Cash declined from $52.3 million at December 31, 2015 to $45.4 million at September 30, 2016. Current assets were $73.7 million and current liabilities $13.4 million. The balance sheet reports no debt; deferred income taxes were $4.9 million.
At September 30, CompX had a $10.7 million receivable from Valhi under an unsecured revolving demand note permitting loans up to $40 million. The note bears interest at prime plus 1%, is payable quarterly, and principal is due on demand but not before December 31, 2017. Management says cash, operating cash flow and potential external financing should cover needs for the next 12 months and five years, including discretionary loans to affiliates.
Changes and operating drivers
- Q3 sales rose 7%, mainly from higher Security Products sales to existing government customers. Nine-month sales fell 1%, chiefly because approximately $4.9 million of prior-year sales for a government security project did not recur.
- A substantial new project for the same government customer began shipping in August 2016 and was expected to continue through year-end. Management said Q3 sales from the new initiative slightly exceeded the prior-year quarter’s $1.7 million of nonrecurring project sales.
- Security Products Q3 sales increased 7%; nine-month sales decreased 2%. Marine Components sales rose 10% in Q3 and 8% year to date, supported by demand in the waterski/wakeboard market.
- Q3 gross margin improved with manufacturing efficiencies and fixed-cost leverage from higher volume. Marine margins also benefited from customer and product mix. Nine-month operating income remained broadly comparable with 2015.
- Receivables increased to $13.0 million from $8.8 million at year-end; management attributed the higher days sales outstanding to expected third-quarter seasonality. Consolidated days in inventory decreased to 70 from 76.
Outlook, risks and other disclosures
Management expected full-year 2016 sales to approach 2015 levels absent a significant change in general economic conditions. It planned to respond to demand fluctuations through staffing reviews, lean manufacturing and cost initiatives, and to pursue market share and product/customer diversification. This is management’s outlook, not quantified earnings guidance.
Risks cited include demand changes, raw-material and other cost increases and ability to pass them through, low-cost competition, customer and product mix, new-product development, litigation, environmental and tax matters, regulation, system upgrades, economic and political conditions, and operational disruptions. The filing reports no material changes in risk factors, market risks, contractual obligations or internal controls during the period. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
CompX is still evaluating adoption of the revenue recognition standard, expected in Q1 2018. It did not expect the intra-entity asset-transfer tax standard, also effective in Q1 2018, to have a material effect. No material contingencies or unusual charges are identified in the provided filing text.
Investor facts to verify
- Whether the new government-customer project shipped as expected through year-end and how its revenue compares with the nonrecurring 2015 project.
- The collectability, terms and concentration risk of the $10.7 million Valhi receivable, and any additional advances under the $40 million facility.
- Whether the expected full-year sales level was achieved, particularly given the year-to-date sales decline and economic sensitivity of OEM demand.
- Whether operating cash flow and margins remain resilient as receivables rise and government-project revenue fluctuates.
- Dividend continuation and capital allocation, including affiliate lending and capital expenditures.