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CIX > SEC Filings for CIX > Form 10-Q on 7-Aug-2014All Recent SEC Filings

Show all filings for COMPX INTERNATIONAL INC

Form 10-Q for COMPX INTERNATIONAL INC


7-Aug-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 $3.9 million in the second quarter of 2014 compared to $2.9 million in the same period of 2013. We reported operating income of $7.2 million for the six month period ended June 30, 2014 compared to $4.4 million for the comparable period in 2013. Our operating income increased for the quarter and for the six month period in 2014 due to the positive impact of higher sales in 2014, primarily from an increase in Security Products sales to certain 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
                                                        June 30,
                                        2013          %          2014          %
                                                 (unaudited)

         Net sales                    $ 24,039       100.0 %   $ 26,848       100.0 %
         Cost of goods sold             16,429        68.3 %     18,235        67.9 %
         Gross profit                    7,610        31.7 %      8,613        32.1 %
         Operating costs and expenses    4,667        19.4 %      4,701        17.5 %
         Operating income             $  2,943        12.2 %   $  3,912        14.6 %

                                                    Six months ended
                                                        June 30,
                                        2013          %          2014          %
                                                 (unaudited)

         Net sales                    $ 45,492       100.0 %   $ 52,629       100.0 %
         Cost of goods sold             31,862        70.0 %     36,267        68.9 %
         Gross profit                   13,630        30.0 %     16,362        31.1 %
         Operating costs and expenses    9,253        20.3 %      9,162        17.4 %
         Operating income             $  4,377         9.6 %   $  7,200        13.7 %

Net sales. Net sales increased $2.8 million in the second quarter of 2014 and $7.1 million in the first six months of 2014 compared to the respective periods in 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. As a percentage of net sales, cost of goods sold for the second quarter of 2014 is comparable to the second quarter of 2013 as improved coverage of fixed manufacturing costs over increased production volumes was offset by the impact of higher medical expenses in the second quarter of 2014. As a result, gross profit margin was comparable over the same period, while gross profit increased by $1.0 million on the higher sales. Cost of goods sold as a percentage of sales decreased by 1% for the first six months of 2014, primarily due to improved coverage of fixed manufacturing costs over increased production volumes to meet the higher demand for our products, partially offset by higher second quarter medical expenses as mentioned above. As a result, gross profit and related margin increased over the same period.

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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 property, plant and equipment. Operating costs and expenses for the second quarter of 2014 are comparable to the same period in 2013 and decreased slightly in the first six months of 2014 as compared to the same period in 2013 due to reduced corporate administrative personnel costs offset in the second quarter of 2014 by increased administrative personnel costs for Security Products.

Operating income. As a percentage of net sales, operating income increased by approximately 2% for the second quarter of 2014, and increased by approximately 4% for the first six months of 2014. These increases were 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.

Segment Results

The key performance indicator for our segments is operating income.



                                  Three months ended                              Six months ended
                                       June 30,                                       June 30,
                                                                 %                                              %
                                  2013             2014       Change             2013             2014        Change
                                (Dollars in thousands)                         (Dollars in thousands)
Net sales:
Security Products             $      20,826      $ 23,045          11 %      $     39,800       $ 46,009           16 %
Marine Components                     3,213         3,803          18 %             5,692          6,620           16 %
Total net sales               $      24,039      $ 26,848          12 %      $     45,492       $ 52,629           16 %
Gross profit:
Security Products             $       6,800      $  7,573          11 %      $     12,439       $ 14,827           19 %
Marine Components                       810         1,040          28 %             1,191          1,535           29 %
Total gross profit            $       7,610      $  8,613          13 %      $     13,630       $ 16,362           20 %
Operating income:
Security Products             $       4,475      $  4,842           8 %      $      7,667       $  9,542           24 %
Marine Components                       312           521          67 %               202            505          150 %
Corporate operating expenses         (1,844 )      (1,451 )        21 %            (3,492 )       (2,847 )         18 %
Total operating income        $       2,943      $  3,912          33 %      $      4,377       $  7,200           64 %
Gross profit margin:
Security Products                        33 %          33 %                            31 %           32 %
Marine Components                        25 %          27 %                            21 %           23 %
Total gross profit margin                32 %          32 %                            30 %           31 %
Operating income margin:
Security Products                        21 %          21 %                            19 %           21 %
Marine Components                        10 %          14 %                             4 %            8 %
Total operating income margin            12 %          15 %                            10 %           14 %

Security Products. Security Products net sales increased 11% in the second quarter and 16% in the first six months of 2014 compared to the same periods last year. The increase in sales for the second quarter and six month period is primarily due to increases of approximately $1.3 million and $2.9 million, respectively, in sales of new products for an existing customer, $1.3 million and $2.3 million, respectively, to transportation market customers as a result of general improvement in seasonal demand, and $400,000 and $1.3 million, respectively, to electronic lock customers in 2014 due to two significant project installations.

Gross profit margin for the second quarter of 2014 was comparable to the same period in 2013 primarily due to improved coverage of fixed manufacturing costs over increased production volumes offset by the impact of an increase of $360,000 in medical expenses in the second quarter of 2014. Operating costs and expenses in the second quarter of 2014 increased approximately $410,000 as compared to the second quarter of 2013, primarily as a result of an increase in administrative personnel and benefits costs during the second quarter. As a result, Security Products operating income as a percentage of net sales for the second quarter of 2014 was comparable to the second quarter of 2013. Gross profit margin for the first six months of 2014 increased 1 percentage point on net sales due to fixed manufacturing costs over increased production volumes partially offset by the second quarter increase in medical expenses discussed above. Additionally, operating costs and expenses for the first six months of 2014 increased approximately

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$515,000, primarily as a result of the increase in administrative personnel and benefits costs during the second quarter of 2014. Security Products operating income as a percentage of net sales increased 2 percentage points for the first six months of 2014 compared to the first six months of 2013 primarily as a result of factors impacting gross profit partially offset by increased operating costs and expenses discussed above.

Marine Components. Marine Components net sales increased 18% and 16% in the second quarter and first six months of 2014, respectively, as compared to the same periods last year. The increase in sales is primarily due to gains in market share for products sold to the ski/wakeboard and other non-high performance marine markets. Gross margin and operating income percentage improved in the second quarter and for the first six months of 2014 compared to the same periods in 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 half of 2014 does not reflect our expectation for full year sales trends due to seasonal influences and the impact of one-time projects for some of our larger customers, overall demand trends are positive in many of the 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 do not attribute current sales levels to improvement in the overall North American economy, we do believe that the markets we serve are benefitting from recent 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.

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 provided by operating activities for the first six months of 2014 increased by $13.2 million as compared to the first six months of 2013. The increase is primarily due to the positive impact of lower net cash paid for taxes in 2014 of $10.7 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.

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 June 30, 2014 varied by segment. Generally, we expect our average days sales outstanding to increase from December to June as a result of seasonal increase in sales during the second quarter as compared to the fourth quarter. Overall, our June 30, 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 June 30, 2013 numbers below.

  Days Sales Outstanding:      December 31, 2012   June 30, 2013   December 31, 2013   June 30, 2014
Security Products                   41 Days           42 Days           35 Days           43 Days
Marine Components                   32 Days           31 Days           35 Days           36 Days
Consolidated CompX                  40 Days           41 Days           35 Days           42 Days

As shown below, our total average number of days in inventory on a consolidated basis increased from December 31, 2013 to June 30, 2014 principally due to elevated Security Products inventory levels. Security Products inventories, relative to sales, have been higher during the first half of 2014 due to the introduction of new products and due to intentional measures to avoid shortages of certain long lead-time components. 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 June 30, 2013 numbers below.

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     Days in Inventory:        December 31, 2012   June 30, 2013   December 31, 2013   June 30, 2014
Security Products                   71 Days           66 Days           71 Days           77 Days
Marine Components                   91 Days           82 Days          110 Days           93 Days
Consolidated CompX                  74 Days           68 Days           76 Days           79 Days

Investing activities. Net cash used in investing activities was $1.6 million in the first six months of 2014 compared to net cash provided of $3.1 million in the first six months of 2013. Our capital expenditures in the first six months of 2014 were $1.6 million, slightly higher as compared to $1.5 million in the first six months of 2013. In addition, during 2013:

- We collected $3.0 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 $1.2 million in the first six months of 2014 compared to net cash used of $2.7 million in the first six months of 2013. The change is primarily a result of the following items:

- Aggregate dividends we paid in the first six months 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

- Principal repayments of $500,000 on long term debt during the first six months 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.

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 our $37.6 million aggregate cash and cash equivalents at June 30, 2014 were held in the U.S.

Capital Expenditures. Firm purchase commitments for capital projects in process at June 30, 2014 totaled $381,000. 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 -

See Note 9 to our Condensed Consolidated Financial Statements.

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Critical accounting policies -

There have been no changes in the first six months 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,

- 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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