CompX International Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012 (52 weeks). This is an annual filing, not a standalone Q4 filing; quarterly results are summarized below where relevant. CompX manufactures security products and recreational marine components. On December 28, 2012, it sold its Furniture Components segment and now reports Security Products and Marine Components as continuing segments.
Financial performance
Amounts are in U.S. dollars; millions unless stated otherwise.
| Metric | FY 2012 | FY 2011 | Change / context |
|---|---|---|---|
| Net sales, continuing operations | $83.2 | $79.8 | Up 4%; higher customer demand across both segments |
| Gross profit / margin | $24.3 / 29% | $24.1 / 30% | Gross profit up slightly; margin down about 1 percentage point |
| Operating income / margin | $5.4 / 7% | $6.4 / 8% | Down 16% |
| Income from continuing operations | $3.5 | $3.5 | Essentially unchanged; diluted EPS $0.28 in both years |
| Net income | $35.0 | $7.7 | Includes $27.6 after-tax gain on Furniture Components sale |
| Cash from operating activities | $13.8 | $16.0 | Includes cash flows of disposed operations through sale date |
| Cash from investing activities | $51.7 | $7.2 | Includes sale proceeds and sale of a facility |
| Cash from financing activities | $(12.0) | $(26.7) | Includes debt repayments and $6.2 of dividends |
- Segment results: Security Products sales were $73.7 million, up 3%, with operating income of $14.1 million versus $14.4 million. Marine Components sales were $9.5 million, up 13%; its operating loss narrowed to $0.8 million from $1.2 million.
- Liquidity and balance sheet: Cash and cash equivalents were $63.8 million at year-end, compared with $10.1 million a year earlier. Current assets were $90.6 million and current liabilities $24.5 million. Total assets were $150.2 million; stockholders’ equity was $102.1 million.
- Debt: Total debt was $18.5 million, all variable rate, including a $1.0 million current maturity. The revolving credit facility was repaid and terminated in 2012. The remaining note bears interest at LIBOR plus 1% (1.4% at year-end) and matures in 2014.
- Dividends: CompX paid $0.50 per share in 2012, or $6.2 million in total. The board declared a $0.125-per-share first-quarter 2013 dividend; future dividends are discretionary.
- Q4 context: Fourth-quarter sales were $19.3 million and operating income was reported as zero; continuing-operations income was $0.6 million. Net income of $28.7 million largely reflected the disposal gain.
Material changes and unusual items
- The Furniture Components segment was sold for approximately $58.0 million net cash proceeds. The pre-tax disposal gain was approximately $29.6 million, including $12.7 million reclassified from accumulated currency translation adjustments; the after-tax gain reported was $27.6 million.
- Continuing-operations sales increased, but operating income fell as higher self-insured medical costs and general and administrative expenses more than offset sales growth. Medical costs in Security Products were $925,000 higher than in 2011, which had unusually favorable costs.
- CompX recorded $1.2 million of 2012 write-downs and losses related to assets held for sale, including a $757,000 loss on the Byron Center facility sale. The River Grove facility sale closed in the first quarter of 2013.
- The sale drove a large increase in year-end cash and reduced total debt. It also eliminated the company’s non-U.S. operating subsidiaries. 2012 reported net income and cash generation therefore are not directly indicative of ongoing operations.
Outlook, risks and contingencies
- Management said customer demand remained uncertain and did not provide a specific sales or earnings forecast. It planned to pursue lean manufacturing, cost improvements, new product features and market-share growth, while adjusting staffing to order levels.
- Management expected commodity-related raw material prices, including zinc, brass and stainless steel, to rise in 2013. These materials represented about 10% of cost of goods sold; competitive conditions may limit the ability to recover cost increases through pricing.
- Management expected 2013 operating cash flow to be a net use of cash, primarily due to an approximately $12.2 million tax payment associated with the sale, expected in the first quarter. Estimated 2013 capital expenditures were $3.6 million. The filing says cash on hand and operating cash flows should meet near-term needs, subject to actual results.
- Management expected the 2013 effective tax rate to be higher than 2012’s 29% continuing-operations rate. Interest income was expected to increase with higher cash balances.
- Key risks include competitive pricing, customer demand fluctuations, raw-material cost volatility and supply, customer concentration, product development and production execution, intellectual-property claims, environmental and regulatory changes, and operating disruptions. Harley-Davidson represented about 12% of 2012 sales; the ten largest continuing-operations customers represented about 38%.
- CompX is part of the Contran tax group and is jointly and severally liable for group federal income taxes for applicable periods; NL agreed to indemnify CompX for group tax liability exceeding its allocated liability. The company also disclosed related-party service and insurance arrangements. Its demand lending arrangement with NL permits loans up to $40 million; no balance was outstanding at year-end.
- The company reported no material expected adverse effect from pending legal or environmental matters, but outcomes remain subject to uncertainty. Marine Components’ long-lived assets were not impaired; management said substantially lower future cash flows than expected could make impairment reasonably likely.
Important facts for investors to verify
- Separate ongoing operating performance from the $27.6 million after-tax disposal gain; verify continuing-operations results and the post-sale business mix.
- Confirm payment and tax treatment of the approximately $12.2 million sale-related tax obligation, and whether the expected 2013 operating cash outflow occurred.
- Assess the sustainability of cash balances after sale proceeds, planned capital spending, dividends and any related-party lending to NL.
- Track Marine Components’ operating losses and impairment assumptions, plus changes in demand and commodity costs.
- Review customer concentration, related-party arrangements and the remaining variable-rate note due in 2014.
- The filing’s financial statements received an unqualified independent audit opinion. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not attest to internal-control effectiveness.