Business context and reporting period
CompX International Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2015. It manufactures security products, including cabinet locks, and recreational marine components. NL Industries owned approximately 87% of CompX at quarter-end.
Financial performance and liquidity
Amounts below are in millions of dollars except per-share data and margins.
| Metric | Q3 2014 | Q3 2015 | 9M 2014 | 9M 2015 |
|---|---|---|---|---|
| Net sales | $26.5 | $26.5 | $79.1 | $83.3 |
| Gross profit | $8.1 | $8.1 | $24.5 | $25.8 |
| Gross margin | 30.8% | 30.6% | 31.0% | 31.0% |
| Operating income | $3.4 | $3.4 | $10.6 | $11.4 |
| Operating margin | 13.0% | 13.0% | 13.5% | 13.7% |
| Net income | $2.2 | $2.2 | $6.9 | $7.5 |
| Diluted earnings per share | $0.18 | $0.18 | $0.56 | $0.60 |
- Cash flow: Nine-month operating cash flow was $6.7 million, down from $7.2 million. Capital expenditures were $2.5 million; dividends paid were $1.9 million. Cash increased $2.3 million to $47.9 million.
- Balance sheet: At September 30, cash was $47.9 million, current assets $78.0 million, current liabilities $11.6 million, and stockholders’ equity $116.7 million. The balance sheet reports no borrowings or debt balance. Current ratio was approximately 6.7x.
- Dividends: $0.05 per share each quarter; $0.15 per share for the first nine months, unchanged from 2014.
Material changes versus prior comparable periods
- Third-quarter sales and operating income were essentially unchanged year over year. Net income rose modestly to $2.2 million from $2.2 million; diluted EPS remained $0.18.
- Nine-month sales increased 5%, operating income 8%, and net income 8%. Growth primarily reflected higher Security Products sales to government customers in the first half, plus improved Marine Components demand.
- Security Products nine-month sales rose 5% to $72.8 million, while operating income increased 3% to $14.7 million. In Q3, segment sales declined 1% and operating income fell 5%.
- Marine Components nine-month sales increased 6% to $10.5 million and operating income rose 77% to $1.3 million, supported by waterski/wakeboard boat demand, product introductions, improved manufacturing efficiencies, and product mix.
- Nine-month operating cash flow declined $0.5 million, primarily due to $1.2 million more cash taxes paid, partly offset by higher operating income. Receivables rose to $11.6 million from $8.7 million at year-end; inventory declined to $15.4 million from $16.9 million.
Outlook, risks, contingencies, and unusual items
- Management provided no quantified earnings or sales guidance. It said Q3 sales returned to more normalized levels after a strong first half, noted that demand gains were not broad-based, and expects normal seasonal demand to subside in Q4.
- Management cited product diversification, innovation, market-share opportunities, lean manufacturing, and cost-improvement initiatives as priorities; it plans to adjust staffing in response to customer demand.
- Management believes cash, operating cash flow, and access to external financing will meet liquidity needs for working capital, capital spending, debt service, and dividends over the next 12 months and five years. Capital-project purchase commitments totaled $0.9 million.
- Risks include demand variability, raw-material and other cost changes, low-cost competition, customer and product mix, product development, litigation, environmental and tax matters, regulation, economic conditions, and operating interruptions. The filing reports no material change in risk factors or market risks from the 2014 annual report.
- No material change in contractual obligations was reported. The company stated it had no off-balance-sheet financing arrangements other than operating leases. It terminated its revolving loan facility with NL in May 2015; it had made no loans under the facility since before 2014.
- ASU 2014-09 on revenue recognition was expected to be adopted in Q1 2018; the company was still evaluating its impact and adoption method. Management stated disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether demand from government customers and the waterski/wakeboard boat market remains strong after the first-half sales increase, particularly given management’s Q4 seasonality expectations.
- Whether Security Products’ lower margins and higher fixed and administrative costs persist, and whether Marine Components can sustain recent margin improvement.
- Whether receivables and working-capital movements convert to cash as expected, and whether cash flow covers planned capital spending and dividends.
- Details of operating leases, contractual commitments, and risks referenced in the 2014 Form 10-K, which are not fully reproduced in this filing.
- The eventual financial-statement impact and adoption approach for the new revenue-recognition standard.