CompX International Faces Adversity in Q3 2024 Amid Market Shifts
CompX International Inc. (CIX) encountered difficulties in the third quarter of 2024, grappling with changing demand and increasing costs in its major sectors. The company’s performance showed setbacks in the Security Products and Marine Components divisions, primarily due to a drop in government orders, a cooling recreational marine market, and rising material and labor expenses.
Even with these challenges, CompX International has improved its liquidity, showcasing its dedication to returning value to shareholders by continuing its stock repurchase efforts. However, the company’s ability to adapt to ongoing market changes and manage expenses will be critical to maintaining profitability.
Q3 Financial Results: Earnings and Sales
In the third quarter of 2024, CompX International reported earnings per share at 28 cents, which is a significant drop of 39.6% from 47 cents in the same period last year. This downturn was largely attributed to decreased sales volume coupled with rising costs.
Net sales for the quarter totaled $33.67 million, a decline of 16.6% from $40.36 million the previous year. This drop resulted from diminishing demand in the Security Products and Marine Components sectors. Notably, the Marine Components division saw a 21% drop in sales year over year, while Security Products experienced a 15% decline due to decreased orders from crucial government security and transportation sector clients.
Stock Performance and EPS Analysis
CompX International Inc. price-consensus-eps-surprise-chart | CompX International Inc. Quote
Divisional Breakdown
Security Products: Sales in this segment reached $26.57 million in Q3 2024, marking a 15% drop from $31.38 million in the same quarter last year. Operating income fell by 30% to $4.55 million.
The decline in both sales and operating income was due to reduced sales to a government security client tied to a pilot project that significantly boosted sales in Q3 2023 but did not recur this year. Additionally, sales to the transportation market decreased by $1.4 million. A rise in demand from the healthcare market helped somewhat, contributing an additional $1.2 million in sales.
Marine Components: This segment experienced sales of $7.10 million, down 21% from $8.98 million last year. Operating income for Marine Components was $0.60 million, down 64% from the previous year.
The sales decline is linked to lower demand in both the recreational marine and industrial markets, especially in the towboat segment. Industry challenges have continued to constrain demand in this market. Although reduced employee benefits from headcount cuts provided some relief, it wasn’t enough to offset the large drop in sales volumes.
Profitability Overview
The gross margin for the third quarter of 2024 decreased by 3.2% to 28.1%, down from 31.3% in the same period of the previous year. This decline was mainly driven by lower sales volumes along with increased material and labor costs affecting the cost of sales in both segments.
CompX International’s operating income dropped to $3.35 million, down 48.8% from $6.55 million in Q3 2023. This decline highlights the effects of lower sales and rising operational costs.
The company reported net income of $3.48 million for the quarter, a decrease of 39.6% from $5.76 million in Q3 2023. This drop was linked to reduced operating income and higher operational costs as a proportion of sales. While interest income saw a slight uptick due to improved rates and higher investment balances, it couldn’t fully counteract the overall profitability decline.
By September 30, 2024, CompX International’s return on equity (ROE) declined as net income fell and the equity base reduced. Retained earnings also dropped by 17.9%, from $111.8 million in Q3 2023 to $91.8 million in Q3 2024 due to dividends and lower earnings impacting the overall equity.
Cost Trends
The cost of sales increased as a percentage of revenues, reaching 71.9% compared to 68.7% the previous year, causing the gross margin to fall from 31.3% to 28.1%. Operating costs slightly increased to $6.12 million, up from $6.07 million, driven primarily by higher employee salaries and benefits.
Cash Flow and Future Investments
CompX International’s liquidity improved in Q3 2024, as cash and cash equivalents rose to $58.79 million from $41.39 million at the end of 2023.
The company dedicated $1.2 million toward capital expenditures in the first nine months of 2024 to meet customer demands and maintain facility operations, with a full-year capex target of $2.1 million.
Future Expectations
Management anticipates that tough conditions will persist in crucial markets, notably the government security and recreational marine sectors. They expect Security Products sales to level off at lower rates for the rest of 2024, while demand in the towboat market is projected to remain weak due to ongoing economic challenges and higher interest rates, which affect consumer spending in the recreational market. Management plans to align resources and inventory more closely with current demand trends.
Recent Developments
In August 2024, CompX International announced a special dividend of $2 per share, totaling $24.6 million distributed to shareholders. The company continues to assess inventory levels and implement cost-saving measures, particularly in Marine Components, to align with fluctuating demand. As of September 30, 2024, the stock repurchase program had 523,647 shares remaining for repurchase.
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