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CIX > SEC Filings for CIX > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for COMPX INTERNATIONAL INC

Form 10-Q for COMPX INTERNATIONAL INC


8-May-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We are a leading manufacturer of engineered components utilized in a variety of applications and industries. Through our Security Products segment we manufacture mechanical and electronic cabinet locks and other locking mechanisms used in recreational transportation, postal, office and institutional furniture, cabinetry, tool storage and healthcare applications. We also manufacture stainless steel exhaust systems, gauges and throttle controls for the recreational marine and other industries through our Marine Components segment.

We reported operating income of $3.3 million in the first quarter of 2014 compared to $1.4 million in the same period of 2013. Our operating income increased in 2014 primarily due to the positive impact of higher sales in 2014, primarily from an increase in Security Products sales to existing customers as well as increased market penetration in electronic locks.

Our product offerings consist of a significantly large number of products that have a wide variation in selling price and manufacturing cost, which results in certain practical limitations on our ability to quantify the impact of changes in individual product sales quantities and selling prices on our net sales, cost of goods sold and gross profit. In addition, small variations in period-to-period net sales, cost of goods sold and gross profit can result from changes in the relative mix of our products sold.

Results of Operations



                                                   Three months ended
                                                        March 31,
                                        2013          %          2014          %
                                                 (Dollars in thousands)
         Net sales                    $ 21,453       100.0 %   $ 25,781       100.0 %
         Cost of goods sold             15,433        71.9       18,032        69.9
         Gross profit                    6,020        28.1        7,749        30.1
         Operating costs and expenses    4,586        21.4        4,461        17.3
         Operating income             $  1,434         6.7 %   $  3,288        12.8 %

Net sales. Net sales increased $4.3 million in the first quarter of 2014 compared to the same period of 2013, led by strong demand within Security Products, including new products for an existing government customer, increased market penetration in electronic locks and strong demand in transportation markets. Relative changes in selling prices did not have a material impact on net sales comparisons.

Cost of goods sold and gross profit. Cost of goods sold as a percentage of sales decreased by 2% in the first quarter of 2014 compared to the same period in 2013. As a result, gross profit and related margin increased over the same period. The increase in gross profit is primarily due to improved coverage of fixed manufacturing costs over increased production volumes to meet the higher demand for our products.

Operating costs and expenses. Operating costs and expenses consist primarily of sales and administrative related personnel costs, sales commissions and advertising expenses, as well as gains and losses on plant, property and equipment. Operating costs and expenses decreased slightly in the first quarter of 2014 as compared to the same period in 2013 due to reduced administrative personnel costs.

Operating income. As a percentage of net sales, operating income increased by 6% in 2014 compared to 2013 and was primarily impacted by the factors impacting gross margin and operating costs and expenses above.

Provision for income taxes. A tabular reconciliation between our effective income tax rates and the U.S. federal statutory income tax rate of 35% is included in Note 7 to the Condensed Consolidated Financial Statements. Our operations are wholly within the U.S. and therefore our effective income tax rate is primarily reflective of the U.S. federal statutory rate.

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Segment Results

The key performance indicator for our segments is operating income.



                                           Three months ended
                                                March 31,               %
                                           2013          2014         Change
                                             (In thousands)
            Net sales:
            Security Products            $  18,974     $  22,964           21 %
            Marine Components                2,479         2,817           14 %
            Total net sales              $  21,453     $  25,781           20 %
            Gross profit:
            Security Products            $   5,638     $   7,254           29 %
            Marine Components                  382           495           30 %
            Total gross profit           $   6,020     $   7,749           29 %
            Operating income:
            Security Products            $   3,193     $   4,699           47 %
            Marine Components                 (110 )        (16)           85 %
            Corporate operating expenses    (1,649 )     (1,395)           15 %
            Total operating income       $   1,434     $   3,288          129 %

Security Products. Security Products net sales increased 21% in the first quarter of 2014 compared to the same period last year. The increase in sales is primarily due to an increase of approximately $1.6 million in sales of new products for an existing customer, $1.0 million to transportation market customers as a result of general improvement in demand, and $900,000 to electronic lock customers in 2014 due to two special project installations. Gross margin increased approximately 2 percentage points on net sales in the first quarter of 2014 compared to the same period in 2013 primarily due to improved coverage of fixed manufacturing costs over increased production volumes. Additionally, operating costs and expenses increased only slightly from the first quarter of 2013. As a result, operating income as a percentage of net sales for the Security Products segment increased 4 percentage points for the first quarter of 2014 compared to the first quarter of 2013.

Marine Components. Marine Components net sales increased 14% in the first quarter of 2014 as compared to the same period last year. The increase in sales is primarily due to gains in market share for products sold to the performance boat and ski/wakeboard marine markets. Gross margin and operating loss percentage improved in the first quarter of 2014 compared to the first quarter of 2013 primarily due to increased leverage of fixed costs as a result of higher volumes.

Outlook.

While the robust demand for our products experienced in the first quarter does not reflect our expectation for full year sales trends due to the impact of one-time projects and seasonal influences for some of our larger customers, we believe that the overall demand signals are currently positive in various markets we serve. In addition, we continue to experience the benefits of diversification in our product offerings and ongoing innovation to serve new markets, most recently with our line of electronic locks for multiple high security applications. And while we cannot attribute current sales levels to perceptible growth in the overall North American economy, we do believe that the markets we serve are benefitting from improved stability in general economic conditions. As in prior periods, we will continue to monitor sales order rates and respond to fluctuations in customer demand through continuous evaluation of staffing levels and consistent execution of our lean manufacturing and cost improvement initiatives.

Volatility in the costs of commodity raw materials is expected to continue. Our primary commodity raw materials are zinc, brass and stainless steel, which together represent approximately 11% of our total cost of goods sold. We generally seek to mitigate the impact of fluctuations in commodity raw material costs on our margins through improvements in production efficiencies or other operating cost reductions. In the event we are unable to offset commodity raw material cost increases with other cost reductions, it may be difficult to recover those cost increases through increased product selling prices or surcharges due to the competitive nature of the markets served by our products. Additionally, significant surcharges may negatively affect our margins as they typically only recover the increased cost of the raw material without adding margin dollars resulting in a lower margin percentage. Consequently, overall operating margins may be negatively affected by commodity raw material cost pressures.

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Liquidity and Capital Resources

Consolidated cash flows -

Operating activities. Trends in cash flows from operating activities, excluding changes in assets and liabilities have generally been similar to the trends in operating earnings. Changes in assets and liabilities result primarily from the timing of production, sales and purchases. Changes in assets and liabilities generally tend to even out over time. However, period-to-period relative changes in assets and liabilities can significantly affect the comparability of cash flows from operating activities.

Our net cash used by operating activities for the first three months of 2014 decreased by $12.3 million as compared to the first three months of 2013 primarily due to the net effects of:

- The positive impact of lower net cash paid for taxes in 2014 of $11.9 million primarily related to the previously-reported payment of income taxes in 2013 associated with the gain on sale of our disposed operations ($11.6 million) recognized in the fourth quarter of 2012; and

- The negative impact of higher net cash used by relative changes in our inventories, receivables, payables and non-tax related accruals attributable to our operations of $1.5 million in 2014, primarily related to relatively higher account receivable and inventory balances in 2014 (as discussed below).

Relative changes in working capital can have a significant effect on cash flows from operating activities. As shown below, the change in our average days sales outstanding from December 31, 2013 to March 31, 2014 varied by segment. Generally, we expect our average days sales outstanding to increase from December to March as the result of a seasonal increase in sales during the first quarter as compared to the fourth quarter. Overall, our March 31, 2014 days sales outstanding compared to December 31, 2013 is in line with our expectations. For comparative purposes, we have provided December 31, 2012 and March 31, 2013 numbers below.

  Days Sales Outstanding:      December 31, 2012   March 31, 2013   December 31, 2013   March 31, 2014
Security Products                   41 Days           42 Days            35 Days           45 Days
Marine Components                   32 Days           30 Days            35 Days           41 Days
Consolidated CompX                  40 Days           40 Days            35 Days           45 Days

As shown below, our total average number of days in inventory was comparable from December 31, 2013 to March 31, 2014 and is in line with our expectations. The variability in days in inventory among our segments primarily relates to the differences in the complexity of the production processes and therefore the length of time it takes to produce end-products. For comparative purposes, we have provided December 31, 2012 and March 31, 2013 numbers below.

     Days in Inventory:        December 31, 2012   March 31, 2013   December 31, 2013   March 31, 2014
Security Products                   71 Days           67 Days            71 Days           72 Days
Marine Components                   91 Days           91 Days           110 Days           107 Days
Consolidated CompX                  74 Days           70 Days            76 Days           76 Days

Investing activities. Net cash used in investing activities was $747,000 in the first quarter of 2014 compared to net cash provided of $2.7 million in the first quarter of 2013. Our capital expenditures in the first quarter of 2014 were $747,000, slightly higher as compared to $663,000 in the first quarter of 2013. In addition, during 2013:

- We collected $1.8 million in principal payments on a note receivable; and

- We received $1.6 million in net proceeds on the sale of an asset held for sale.

Financing activities. Net cash used in financing activities was $619,000 in the first quarter of 2014 compared to net cash used of $1.8 million in the first quarter of 2013. The change is primarily a result of the following items:

- Aggregate dividends we paid in the first quarter of 2014 were approximately $930,000 lower as compared to the same period in 2013 as a result of reducing our regular quarterly dividend from $0.125 per share to $0.05 per share beginning in the second quarter of 2013; and

- A principal repayment of $250,000 on long term debt during the first quarter of 2013.

Future cash requirements -

Liquidity . Our primary source of liquidity on an on-going basis is our cash flow from operating activities, which is generally used to (i) fund capital expenditures, (ii) repay short-term or long-term indebtedness incurred primarily for capital expenditures, investment activities or reducing our outstanding stock and (iii) provide for the payment of dividends (if declared). From time-to-time, we will incur indebtedness, primarily to fund capital expenditures or business combinations. In addition, from time-to-time, we may also sell assets outside the ordinary course of business, the proceeds of which are generally used to repay indebtedness (including indebtedness which may have been collateralized by the assets sold) or to fund capital expenditures or business combinations.

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Periodically, we evaluate liquidity requirements, alternative uses of capital, capital needs and available resources in view of, among other things, our capital expenditure requirements, dividend policy and estimated future operating cash flows. As a result of this process, we have in the past and may in the future seek to raise additional capital, refinance or restructure indebtedness, issue additional securities, modify our dividend policy or take a combination of such steps to manage our liquidity and capital resources. In the normal course of business, we may review opportunities for acquisitions, joint ventures or other business combinations in the component products industry. In the event of any such transaction, we may consider using available cash, issuing additional equity securities or increasing our indebtedness or that of our subsidiaries.

We believe that cash generated from operations together with cash on hand, as well as, our ability to obtain external financing, will be sufficient to meet our liquidity needs for working capital, capital expenditures, debt service and dividends (if declared) for both the next 12 months and five years. To the extent that our actual operating results or other developments differ from our expectations, our liquidity could be adversely affected.

All of the $35.0 million aggregate cash and cash equivalents at March 31, 2014 were held in the U.S.

Capital Expenditures. Firm purchase commitments for capital projects in process at March 31, 2014 totaled $628,000. Our 2014 capital investments are limited to those expenditures required to meet our expected customer demand and those required to properly maintain our facilities and technology infrastructure.

Commitments and Contingencies. There have been no material changes in our contractual obligations since we filed our 2013 Annual Report, and we refer you to that report for a complete description of these commitments.

Off-balance sheet financing arrangements -

We do not have any off-balance sheet financing agreements other than the operating leases discussed in our 2013 Annual Report.

Recent accounting pronouncements -

Not applicable.

Critical accounting policies -

There have been no changes in the first quarter of 2014 with respect to our critical accounting policies presented in Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2013 Annual Report.

Forward-looking information -

As provided by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, we caution that the statements in this Quarterly Report on Form 10-Q relating to matters that are not historical facts are forward-looking statements that represent our beliefs and assumptions based on currently available information. Forward-looking statements can be identified by the use of words such as "believes," "intends," "may," "should," "anticipates," "expects" or comparable terminology, or by discussions of strategies or trends. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we do not know if our expectations will prove to be correct. Such statements by their nature involve substantial risks and uncertainties that could significantly impact expected results, and actual future results could differ materially from those described in such forward-looking statements. Among the factors that could cause actual future results to differ materially are the risks and uncertainties discussed in this Quarterly Report and those described from time to time in our other filings with the Securities and Exchange Commission. While it is not possible to identify all factors, we continue to face many risks and uncertainties including, but not limited to the following:

- Future demand for our products,

- Changes in our raw material and other operating costs (such as zinc, brass and energy costs) and our ability to pass those costs on to our customers or offset them with reductions in other operating costs,

- Price and product competition from low-cost manufacturing sources (such as China),

- The impact of pricing and production decisions,

- Customer and competitor strategies including substitute products,

- Uncertainties associated with the development of new product features,

- Future litigation,

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- Potential difficulties in integrating future acquisitions,

- Decisions to sell operating assets other than in the ordinary course of business,

- Environmental matters (such as those requiring emission and discharge standards for existing and new facilities),

- The ultimate outcome of income tax audits, tax settlement initiatives or other tax matters,

- The impact of current or future government regulations (including employee healthcare benefit related regulations),

- Potential difficulties in upgrading or implementing new manufacturing and accounting software systems,

- General global economic and political conditions that introduce instability into the U.S. economy (such as changes in the level of gross domestic product in various regions of the world),

- Operating interruptions (including, but not limited to labor disputes, hazardous chemical leaks, natural disasters, fires, explosions, unscheduled or unplanned downtime, transportation interruptions and cyber attacks); and

- Possible disruption of our business or increases in the cost of doing business resulting from terrorist activities or global conflicts.

Should one or more of these risks materialize or if the consequences worsen, or if the underlying assumptions prove incorrect, actual results could differ materially from those currently forecasted or expected. We disclaim any intention or obligation to update or revise any forward-looking statement whether as a result of changes in information, future events or otherwise.

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