CompX International Inc. — Q1 2020 Form 10-Q
Business and period. CompX manufactures security products and recreational marine components. This unaudited report covers the three months ended March 31, 2020; the company notes its actual fiscal quarter ended March 29, 2020. Comparisons are with Q1 2019.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $32.3 million | $31.2 million |
| Gross margin | $10.4 million; 32.3% | $9.6 million; 30.9% |
| Operating income | $5.0 million; 15.5% of sales | $4.3 million; 13.8% of sales |
| Income before taxes | $5.6 million | $5.1 million |
| Net income | $4.3 million | $4.0 million |
| Diluted EPS | $0.34 | $0.32 |
| Operating cash flow | $(0.2) million | $(2.0) million |
| Capital expenditures | $0.4 million | $0.4 million |
- Sales rose 3.6%; net income rose 7.1%; operating income rose 17.0%. Gross margin increased 1.4 percentage points, and operating margin increased 1.7 points.
- Security Products sales were $25.5 million, up 3%, and segment operating income was $5.7 million, up 13%. Marine Components sales were $6.8 million, up 6%, and segment operating income was $1.1 million, up 20%.
- Cash and cash equivalents were $64.0 million at March 31, versus $63.3 million at December 31, 2019. Total current assets were $99.7 million and current liabilities $11.2 million. The filing reports no debt on the balance sheet.
- Cash from operations was negative, as seasonal working-capital movements absorbed cash; the year-over-year improvement was primarily attributed to higher operating income, payment timing and less cash use from working-capital changes. Investing activities provided $2.2 million, including net collections of $2.6 million on the affiliate note; dividends paid were $1.2 million. Cash increased $0.8 million during the quarter.
- The company reported $25.5 million receivable from affiliate Valhi at March 31. The unsecured demand note bears interest at prime plus 1% and has a $40 million limit. The filing says a further $5.0 million was loaned on March 31, after CompX’s actual fiscal quarter-end, bringing the balance to $30.5 million.
Changes, outlook and risks
- Higher Security Products sales to existing government customers and higher Marine Components sales in towboat and center-console markets drove growth. Favorable customer and product mix improved margins, partly offset by higher medical costs. Selling, general and administrative expense was broadly comparable with the prior year.
- The board raised the regular quarterly dividend from $0.07 to $0.10 per share beginning in Q1 2020. Future dividends remain discretionary.
- COVID-19 had limited operational impact in Q1, but customer shipment postponements began in late March. The Illinois facility closed for one week in late April for cleaning and safety measures, then reopened. Management expected reduced revenue and operating income in Q2 versus Q1 and lower sales and earnings for the remainder of 2020 than otherwise expected. The extent and duration of the impact were uncertain; additional temporary facility closures were possible.
- Management said cash on hand, operating cash generation and access to external financing should meet liquidity needs over the next 12 months and five years. Capital-project purchase commitments were $0.5 million. Management also cited risks from demand changes, supply-chain and facility disruptions, raw-material costs, competition and general economic conditions. No material change in contractual obligations was reported.
- CompX was 86% owned by NL Industries. The filing describes the controlling ownership chain through Valhi and Contran and notes a change in the control analysis following the death of Serena Simmons Connelly on April 22, 2020.
Important facts for investors to verify
- Whether COVID-related customer delays, reduced demand or facility interruptions materially affected subsequent-quarter sales, margins and cash generation.
- The credit exposure, repayment timing and terms of the related-party Valhi note, including the post-quarter-end $5.0 million advance.
- Whether working-capital collections normalize, particularly given the increase in consolidated days sales outstanding from 36 days at year-end to 43 days at quarter-end.
- Future dividend decisions and any changes in liquidity needs, capital spending or affiliate lending.
- The filing states that disclosure controls were effective and that no material changes in internal control over financial reporting occurred during the quarter.