CompX International Inc. — Q1 2019 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2019, compared with Q1 2018; balance-sheet changes are compared with December 31, 2018. CompX manufactures security products and recreational marine components. NL Industries owned 87% of CompX at quarter-end.
Key financial results
| Metric | Q1 2018 | Q1 2019 |
|---|---|---|
| Net sales | $28.4 million | $31.2 million |
| Gross profit / margin | $9.5 million / 33.4% | $9.6 million / 30.9% |
| Operating income / margin | $4.4 million / 15.4% | $4.3 million / 13.8% |
| Net income | $3.7 million | $4.0 million |
| Basic and diluted EPS | $0.30 | $0.32 |
| Operating cash flow | $(0.2) million | $(2.0) million |
| Capital expenditures | $0.6 million | $0.4 million |
Revenue increased about 10% and net income about 7% year over year, while operating income declined about 2%. The effective tax provision was $1.1 million in 2019 versus $1.2 million in 2018; the 2019 provision included a $119,000 foreign-derived intangible income tax benefit.
Financial position and cash flow
At March 31, 2019, cash was $36.1 million, down $9.3 million from year-end; current assets were $70.9 million and current liabilities $10.4 million. Total assets were $166.4 million and stockholders’ equity $152.7 million. No borrowings are shown on the balance sheet. The company reported a $40.0 million unsecured note receivable from affiliate Valhi, up from $34.0 million at year-end; the note bears interest at prime plus 1% and principal is due on demand, but not before December 31, 2020.
Operating cash use increased to $2.0 million, primarily reflecting working-capital movements and tax-payment timing; management notes that first-quarter operating cash use is generally seasonal. Investing cash use was $6.4 million, including $6.0 million of net lending to Valhi. CompX paid $0.9 million in dividends and raised its regular quarterly dividend from $0.05 to $0.07 per share. Capital-project purchase commitments were $0.9 million.
Material changes and management outlook
- Security Products sales rose 3% to $24.7 million, mainly from higher sales to existing government customers. Operating income fell 10% to $5.1 million; management cited higher labor rates and medical costs. Segment gross margin declined to 32.3% from 34.5%.
- Marine Components sales increased 49% to $6.5 million, driven mainly by surf pipes and wake-enhancement systems sold to an original-equipment boat manufacturer. Operating income rose 54% to $0.9 million, although segment gross margin fell to 25.5% from 27.6% because of less favorable customer and product mix.
- Management expects 2019 sales to exceed 2018, with full-year profitability comparable to 2018. It expects higher labor and medical costs to continue pressuring Security Products margins; no numerical forecast was provided.
Risks, contingencies and other matters
Key risks identified include demand fluctuations, raw-material and operating-cost increases, competition from low-cost manufacturers, customer and product mix, product development, litigation, intellectual-property protection, environmental and regulatory matters, tax outcomes, economic conditions, and operational disruptions. The filing reports no material changes to previously disclosed risk factors or contractual obligations. The affiliate note is unsecured; the company acknowledges that some affiliate loans may have lower credit quality than cash-equivalent alternatives. Adoption of lease-accounting guidance had no material financial-statement effect. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether marine demand and customer orders—especially from the boat manufacturer—remain strong enough to support the sales outlook.
- Whether labor, medical costs, and marine product mix continue to weigh on margins and full-year profitability.
- Collection and credit exposure on the $40.0 million unsecured Valhi note, including the terms and timing of repayment.
- Working-capital trends, including receivables, inventory, and operating cash conversion; consolidated days sales outstanding rose to 45 days from 40 at year-end.
- Future dividend decisions: the $0.07 quarterly dividend is discretionary and not assured.