CompX International Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless otherwise noted. CompX manufactures security products and recreational marine components. It is 87% owned by NL Industries, Inc.
Financial performance
| Metric | Q1 2015 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $27.891 million | $27.075 million | Down 2.9% |
| Gross profit / margin | $8.566 million / 30.7% | $8.205 million / 30.3% | Profit down 4.2% |
| Operating income / margin | $3.700 million / 13.3% | $3.353 million / 12.4% | Down 9.4% |
| Net income | $2.414 million | $2.200 million | Down 8.9% |
| Diluted earnings per share | $0.19 | $0.18 | Down $0.01 |
| Operating cash flow | $(3.005) million | $(2.448) million | Cash use reduced by $0.557 million |
| Capital expenditures | $0.790 million | $1.221 million | Up $0.431 million |
Q1 2016 operating cash flow less capital expenditures was approximately negative $3.669 million. Management says first-quarter operating cash use is generally seasonal, reflecting working-capital changes. Cash and cash equivalents were $48.058 million at March 31, down $4.289 million from year-end 2015. Current assets were $75.732 million and current liabilities $9.693 million. The balance sheet reports no debt; deferred income taxes were $4.973 million. The quarterly dividend was $0.05 per share, with $0.620 million paid.
Segments and material changes
- Security Products: Sales fell 5% to $23.414 million and operating income fell 10% to $4.471 million. A prior-year government security customer order of approximately $1.6 million did not recur; this was partly offset by approximately $366,000 of increased sales to another government customer. Lower production volumes reduced fixed-cost leverage.
- Marine Components: Sales rose 13% to $3.661 million and operating income rose 29% to $0.334 million, primarily on improved demand in the waterski/wakeboard boat market and better customer/product mix.
- Consolidated sales declined $0.816 million. Increased marine sales and other government-customer business partly offset the nonrecurring prior-year security sales. Cost of goods sold declined, but gross margin and operating margin also declined modestly.
- Accounts receivable increased to $11.875 million from $8.760 million at year-end; inventories decreased to $14.419 million from $15.098 million. Accounts payable and accrued liabilities decreased to $8.575 million from $11.618 million.
Outlook, risks and other disclosures
Management expects 2016 sales to remain relatively comparable to the prior year, absent an anticipated catalyst for broader economic growth, while noting that more than $5 million of 2015 sales to one government security end-user is not expected to recur. It cited continued demand from large customers and product innovation and diversification, particularly in recreational boats. The company plans to monitor orders and adjust staffing, continue lean-manufacturing and cost initiatives, and pursue market share, new markets and product development. No specific earnings or margin guidance was provided.
Management believes cash on hand, operating cash generation and access to external financing will meet working-capital, capital expenditure, debt-service and dividend needs over the next 12 months and five years. Approximately $0.910 million of Q1 capital spending related to the Grayslake facility expansion, completed in April 2016; capital-project purchase commitments were $0.217 million at quarter-end.
Identified risks include demand fluctuations, raw-material and energy costs, competition from low-cost sources, pricing and product mix, customer strategies, product development, litigation, environmental and regulatory matters, tax matters, operating interruptions, and general economic and political conditions. The filing reports no material change in risk factors, contractual obligations or market risks from the 2015 Annual Report, and no material change in internal control over financial reporting. Disclosure controls were assessed as effective. The company was evaluating the effect and adoption method for the revenue-recognition standard, then expected to be adopted in Q1 2018. Interim results may not indicate full-year results.
Important facts for investors to verify
- Whether the forecast exclusion of more than $5 million in 2015 government-customer sales is reflected in comparisons and expectations for 2016.
- Whether weaker Security Products volume and reduced fixed-cost leverage persist, and whether Marine Components growth continues.
- Cash conversion and working-capital movements, given negative Q1 operating cash flow and the seasonal pattern described by management.
- Future capital spending, dividend declarations and liquidity assumptions; the filing provides no specific earnings guidance.
- Potential effects and implementation requirements of the revenue-recognition standard, and any developments in the risks referenced from the 2015 Annual Report.