CompX International Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Unless otherwise noted, amounts below are in millions of dollars. CompX manufactures security products and marine components and is 87% owned by NL Industries.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $26.992 | $28.404 | $86.943 | $82.586 |
| Gross profit | $8.198 | $9.399 | $27.391 | $26.090 |
| Operating income | $3.368 | $4.473 | $12.494 | $11.543 |
| Net income | $2.496 | $2.969 | $8.951 | $7.607 |
| Diluted EPS | $0.20 | $0.24 | $0.72 | $0.61 |
| Gross margin | 30.4% | 33.1% | 31.5% | 31.6% |
| Operating margin | 12.5% | 15.7% | 14.4% | 14.0% |
- Cash flow: Nine-month operating cash flow was $8.928 million, up from $7.931 million. Investing activities used $11.427 million, including net advances of $9.3 million to Valhi and $2.127 million of capital expenditures. Dividends paid were $1.864 million.
- Liquidity and balance sheet: Cash was $28.790 million at September 30, 2017, down from $33.153 million at year-end 2016. Current assets were $56.561 million and current liabilities $12.279 million. No debt is listed on the balance sheet. The filing states cash and operating cash flow, together with financing availability, should meet anticipated liquidity needs.
- Related-party receivable: A $36.7 million loan to Valhi was outstanding, against a revolving commitment of up to $40 million. It bears interest at prime plus 1%; principal is due on demand, but not before December 31, 2018.
Changes versus prior comparable periods
- Q3 sales declined 5% and operating income fell 25%. Management attributed the decline primarily to sales to one government security customer in Q3 2016 that did not recur. Q3 gross margin fell 2.7 percentage points, reflecting unfavorable Security Products mix and higher Marine Components manufacturing costs.
- Nine-month sales rose 5% and operating income rose 8%, mainly from higher first-half sales to existing government security customers. Net income increased 18%, including higher interest income on the Valhi loan.
- Security Products Q3 sales fell 7%; nine-month sales increased 5%. Marine Components sales increased 11% in Q3 and 7% year to date, but segment operating income declined in both comparisons.
Outlook, risks and other items
- Management expected 2017 Security Products and Marine Components sales to meet or exceed 2016 levels and anticipated margin improvement in Q4 after resolving production challenges tied to temporary personnel turnover. No numerical earnings guidance was provided.
- Management cited demand, customer and product mix, raw-material and other operating costs, competition, customer concentration, production interruptions, and general economic conditions among the risks to results. It reported no material changes to risk factors or contractual obligations.
- CompX adopted the simplified goodwill impairment standard in Q3; it had no material financial-statement effect. The company expected the 2018 revenue-recognition standard to have minimal revenue impact. The effect of the 2019 lease standard had not been evaluated, though management did not expect a material balance-sheet impact based on disclosed operating lease commitments.
- Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported for the quarter.
Investor verification points
- Review the size, repayment terms, credit risk, and governance oversight of the $36.7 million related-party loan to Valhi.
- Assess the sustainability of government-customer sales and exposure to the recreational-transportation customer whose sales weakened.
- Check whether Q4 margins improved as management expected, particularly in Marine Components after staffing-related production challenges.
- Reconcile the reduction in cash with operating cash generation, capital spending, dividends, and affiliate lending; confirm liquidity assumptions and any debt or financing arrangements not shown in the balance sheet.