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CompX International Inc. Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: May 3, 2011 07:15AM
CompX International Inc. (CIX) filed Quarterly Report for the period ended 2011-03-31.
Highlight of Business Operations:
We reported operating income of $8.8 million in the first quarter of 2011 compared to $1.7 million in the same period of 2010. Our operating income increased in 2011 primarily due to the net effects of:
Litigation. The litigation settlement gain of approximately $7.5 million is discussed in Note 10 to the Condensed Consolidated Financial Statements. Additionally, as a result of the settlement, legal expenses decreased approximately $1.3 million in the first quarter of 2011 compared to the same period of 2010.
Operating income. Operating income improved to $8.8 million for the first quarter of 2011 compared to $1.7 million for the first quarter of 2010. Operating income improved primarily due to the net effects of the litigation settlement gain in 2011 and related lower litigation expenses, and higher sales, partially offset by facility consolidation costs incurred in 2011 and related production inefficiencies, increases in raw material costs and the negative impact of relative changes in currency exchange rates.
Our geographic mix of pre-tax earnings and the U.S. deferred tax related to our foreign earnings that are not permanently reinvested without offset by foreign tax credits where available are the primary reasons our effective income tax rate in 2010 and 2011 is higher than the 35% U.S. federal statutory income tax rate. In the first quarter of 2011, we recognized a $2.1 million provision for deferred income taxes related to the undistributed earnings of our Canadian subsidiary attributable to the $7.5 million patent litigation settlement gain. See Notes 6 and 10 to the Condensed Consolidated Financials Statements. Prior to the first quarter of 2010, we had not recognized a deferred tax liability related to incremental income taxes on the pre-2005 undistributed earnings of our Taiwanese subsidiary, as those earnings were deemed to be permanently reinvested. We are required to reassess the permanent reinvestment conclusion on an ongoing basis to determine if our intentions have changed. In the first quarter of 2010, and based primarily upon changes in our cash management plans, we determined that all of the undistributed earnings of our Taiwanese subsidiary can no longer be considered permanently reinvested in Taiwan. Accordingly, in the first quarter of 2010 we recognized an aggregate $1.9 million provision for deferred income taxes on the pre-2005 undistributed earnings of our Taiwanese subsidiary. Consequently, all of the undistributed earnings of our non-U.S. operations are now considered to be not permanently reinvested.
Furniture Components. Furniture Components net sales increased 6% in the first quarter of 2011 compared to the same period last year. The increase in sales is primarily due to an increase in customer order rates across most customers resulting from improved economic conditions in North America. Gross margin decreased from 24% in the first three months of 2010 to 17% in the first three months of 2011. The decrease in gross margin was primarily the result of (i) a five percentage point decrease in our variable contribution margin due to raw material cost increase as well as variable production inefficiencies relating to the consolidation of two facilities, and (ii) a two percentage point decrease relating to fixed manufacturing cost inefficiencies relating to the consolidation of facilities, each net of the negative impact of changes in currency exchange rates. Furniture Components operating income includes: (i) a patent litigation settlement gain of $7.5 million in the first quarter of 2011, (ii) patent litigation expenses of $1.6 million and $227,000 in the first quarter of 2010 and 2011, respectively, and (iii) facility consolidation costs of approximately $1.0 million in the first quarter of 2011. Excluding the patent litigation settlement gain, patent litigation expenses and facility consolidation costs, operating income percentage decreased 7% in the first quarter of 2011 compared to the first quarter of 2010 primarily due to the decrease in gross margin as noted above. See Note 10 and 7 to the Condensed Consolidated Financial Statements regarding the litigation settlement gain and the facility consolidation costs in the first quarter of 2011, respectively.