SEC Filing Html Data

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarter ended March 31, 2014

Commission file number 1-13905

 

COMPX INTERNATIONAL INC.

(Exact name of Registrant as specified in its charter)

 

Delaware

 

57-0981653

(State or other jurisdiction of

Incorporation or organization)

 

(IRS Employer

Identification No.)

 

5430 LBJ Freeway, Suite 1700,

Three Lincoln Centre, Dallas, Texas

 

75240-2697

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code (972) 448-1400

Indicate by checkmark:

Whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such a shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act). Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer  x    Smaller reporting company  ¨

Whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x.

Number of shares of common stock outstanding on May 5, 2014:

Class A: 2,397,107

Class B: 10,000,000

 

 

 

 

 


COMPX INTERNATIONAL INC.

Index

 

Part I.

  

FINANCIAL INFORMATION

Page

Item 1.

  

Financial Statements

 

 

 

  

 

Condensed Consolidated Balance Sheets – December 31, 2013 and March 31, 2014 (unaudited)

- 3 -

 

 

  

 

Condensed Consolidated Statements of Income - Three months ended March 31, 2013 and 2014 (unaudited)

- 5 -

 

 

  

 

Condensed Consolidated Statements of Cash Flows - Three months ended March 31, 2013 and 2014 (unaudited)

- 6 -

 

 

  

 

Condensed Consolidated Statement of Stockholders’ Equity - Three months ended March 31, 2014 (unaudited)

- 7 -

 

 

  

 

Notes to Condensed Consolidated Financial Statements (unaudited)

- 8 -

 

Item 2.

  

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

- 12 -

 

Item 3.

  

 

Quantitative and Qualitative Disclosure About Market Risk

- 16 -

 

Item 4.

  

 

Controls and Procedures

- 16 -

 

Part II.

  

 

OTHER INFORMATION

 

 

Item 1A.

  

 

Risk Factors

- 18 -

 

Item 6.

  

 

Exhibits

- 18 -

 

Items 2, 3, 4 and 5 of Part II are omitted because there is no information to report.

 

 

 

 

- 2 -


COMPX INTERNATIONAL INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 

 

December 31,

 

 

March 31,

 

ASSETS

2013

 

 

2014

 

 

 

 

 

 

(unaudited)

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

38,753

 

 

$

35,049

 

Accounts receivable, net

 

8,534

 

 

 

12,717

 

Inventories, net

 

13,235

 

 

 

15,131

 

Deferred income taxes

 

2,493

 

 

 

2,493

 

Prepaid expenses and other

 

596

 

 

 

479

 

Total current assets

 

63,611

 

 

 

65,869

 

Other assets:

 

 

 

 

 

 

 

Goodwill

 

23,742

 

 

 

23,742

 

Other noncurrent

 

573

 

 

 

553

 

Total other assets

 

24,315

 

 

 

24,295

 

Property and equipment:

 

 

 

 

 

 

 

Land

 

4,928

 

 

 

4,928

 

Buildings

 

20,523

 

 

 

20,523

 

Equipment

 

57,799

 

 

 

59,983

 

Construction in progress

 

2,588

 

 

 

1,140

 

 

 

85,838

 

 

 

86,574

 

Less accumulated depreciation

 

52,086

 

 

 

52,946

 

Net property and equipment

 

33,752

 

 

 

33,628

 

Total assets

$

121,678

 

 

$

123,792

 

 

- 3 -


COMPX INTERNATIONAL INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

(In thousands)

 

 

December 31,

 

 

March 31,

 

LIABILITIES AND STOCKHOLDERS' EQUITY

2013

 

 

2014

 

 

 

 

 

 

(unaudited)

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

$

9,705

 

 

$

9,485

 

Income taxes payable to affiliates

 

339

 

 

 

1,222

 

Other

 

6

 

 

 

14

 

Total current liabilities

 

10,050

 

 

 

10,721

 

Noncurrent liabilities:

 

 

 

 

 

 

 

Deferred income taxes

 

6,900

 

 

 

6,822

 

Stockholders' equity:

 

 

 

 

 

 

 

Preferred stock

 

 

 

 

 

Class A common stock

 

24

 

 

 

24

 

Class B common stock

 

100

 

 

 

100

 

Additional paid-in capital

 

55,265

 

 

 

55,265

 

Retained earnings

 

49,339

 

 

 

50,860

 

Total stockholders' equity

 

104,728

 

 

 

106,249

 

Total liabilities and stockholders’ equity

$

121,678

 

 

$

123,792

 

 

Commitments and contingencies (Note 1)

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

- 4 -


COMPX INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

 

 

Three months ended

 

 

March 31,

 

 

2013

 

 

2014

 

 

(unaudited)

 

Net sales

$

21,453

 

 

$

25,781

 

Cost of goods sold

 

15,433

 

 

 

18,032

 

Gross profit

 

6,020

 

 

 

7,749

 

Selling, general and administrative expense

 

4,586

 

 

 

4,461

 

Operating income

 

1,434

 

 

 

3,288

 

Interest income

 

16

 

 

 

5

 

Interest expense

 

(59

)

 

 

 

Income before taxes

 

1,391

 

 

 

3,293

 

Provision for income taxes

 

496

 

 

 

1,153

 

Net income

$

895

 

 

$

2,140

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net income per common share

$

0.07

 

 

$

0.17

 

 

 

 

 

 

 

 

 

Cash dividends per share

$

0.125

 

 

$

0.05

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average shares outstanding

 

12,392

 

 

 

12,397

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

- 5 -


COMPX INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

Three months ended

 

 

March 31,

 

 

2013

 

 

2014

 

 

(unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

$

895

 

 

$

2,140

 

Depreciation and amortization

 

835

 

 

 

879

 

Deferred income taxes

 

90

 

 

 

(78

)

Other, net

 

68

 

 

 

85

 

Change in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable, net

 

(1,047

)

 

 

(4,194

)

Inventories, net

 

(734

)

 

 

(1,970

)

Accounts payable and accrued liabilities

 

(3,100

)

 

 

(207

)

Accounts with affiliates

 

(11,791

)

 

 

882

 

Income taxes

 

(2

)

 

 

8

 

Other, net

 

146

 

 

 

117

 

Net cash used in operating activities

 

(14,640

)

 

 

(2,338

)

Cash flows from investing activities:

 

 

 

 

 

 

 

Capital expenditures

 

(663

)

 

 

(747

)

Cash collected on note receivable

 

1,828

 

 

 

 

Proceeds from sale of assets held for sale

 

1,559

 

 

 

 

Proceeds from sale of fixed assets

 

2

 

 

 

 

Net cash provided by (used in) investing activities

 

2,726

 

 

 

(747

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Dividends paid

 

(1,549

)

 

 

(619

)

Repayment of long-term debt

 

(250

)

 

 

 

Other, net

 

 

 

 

 

Net cash used in financing activities

 

(1,799

)

 

 

(619

)

Cash and cash equivalents - net change from:

 

 

 

 

 

 

 

Operating, investing and financing activities

 

(13,713

)

 

 

(3,704

)

Balance at beginning of year

 

63,777

 

 

 

38,753

 

Balance at end of year

$

50,064

 

 

$

35,049

 

Supplemental disclosures - cash paid for:

 

 

 

 

 

 

 

Interest

$

95

 

 

$

-

 

Income taxes

 

12,199

 

 

 

341

 

Noncash investing and financing activities:

 

 

 

 

 

 

 

Accrual for capital expenditures

$

(233

)

 

$

(12

)

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

- 6 -


COMPX INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

Three months ended March 31, 2014

(In thousands)

(unaudited)

 

 

 

 

 

Additional

 

 

 

 

 

 

Total

 

 

Common stock

 

 

paid-in

 

 

Retained

 

 

stockholders'

 

 

Class A

 

 

Class B

 

 

capital

 

 

earnings

 

 

equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2013

$

24

 

 

$

100

 

 

$

55,265

 

 

$

49,339

 

 

$

104,728

 

Net income

 

 

 

 

 

 

 

 

 

 

2,140

 

 

 

2,140

 

Cash dividends

 

 

 

 

 

 

 

 

 

 

(619

)

 

 

(619

)

Balance at March 31, 2014

$

24

 

 

$

100

 

 

$

55,265

 

 

$

50,860

 

 

$

106,249

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

- 7 -


COMPX INTERNATIONAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014

(unaudited)

 

Note 1 – Organization and basis of presentation:

Organization. We (NYSE MKT: CIX) are 87% owned by NL Industries, Inc. (NYSE: NL) at March 31, 2014. We manufacture and sell component products (security products and recreational marine components). At March 31, 2014, (i) Valhi, Inc. (NYSE: VHI) held approximately 83% of NL’s outstanding common stock and (ii) a wholly-owned subsidiary of Contran Corporation (“Contran”) held an aggregate of approximately 94% of Valhi’s outstanding common stock. Substantially all of Contran’s outstanding voting stock is held by family trusts established for the benefit of Lisa K. Simmons and Serena Simmons Connelly, daughters of Harold C. Simmons, and their children (for which Ms. Lisa Simmons and Ms. Connelly are co- trustees) or is held directly by Ms. Lisa Simmons and Ms. Connelly or persons or entities related to them, including their step-mother Annette C. Simmons, the widow of Mr. Simmons. Prior to his death in December 2013, Mr. Simmons served as sole trustee of the family trusts. Under a voting agreement entered into by all of the voting stockholders of Contran, effective in February 2014 and as amended, the size of the board of directors of Contran was fixed at five members, Ms. Lisa Simmons, Ms. Connelly and Ms. Annette Simmons (and in the event of their death, their heirs) each has the right to designate one of the five members of the Contran board and the remaining two members of the Contran board must consist of members of Contran management. Ms. Lisa Simmons, Ms. Connelly, and Ms. Annette Simmons each serve as members of the Contran board. The voting agreement expires in February 2017 (unless Ms. Lisa Simmons, Ms. Connelly and Ms. Annette Simmons otherwise mutually agree), and the ability of Ms. Lisa Simmons, Ms. Connelly, and Ms. Annette Simmons to each designate one member of the Contran board is dependent upon each of their continued beneficial ownership of at least 5% of the combined voting stock of Contran. Consequently, Ms. Lisa Simmons, Ms. Connelly and Ms. Annette Simmons may be deemed to control Contran, Valhi, NL and us.

Basis of presentation. Consolidated in this Quarterly Report are the results of CompX International Inc. and its subsidiaries. The unaudited Condensed Consolidated Financial Statements contained in this Quarterly Report have been prepared on the same basis as the audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2013 that we filed with the Securities and Exchange Commission (“SEC”) on March 5, 2014 (the “2013 Annual Report”). In our opinion, we have made all necessary adjustments (which include only normal recurring adjustments) in order to state fairly, in all material respects, our consolidated financial position, results of operations and cash flows as of the dates and for the periods presented. We have condensed the Consolidated Balance Sheet at December 31, 2013 contained in this Quarterly Report as compared to our audited Consolidated Financial Statements at that date, and we have omitted certain information and footnote disclosures (including those related to the Consolidated Balance Sheet at December 31, 2013) normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Our results of operations for the interim period ended March 31, 2014 may not be indicative of our operating results for the full year. The Condensed Consolidated Financial Statements contained in this Quarterly Report should be read in conjunction with our 2013 Consolidated Financial Statements contained in our 2013 Annual Report.  

Unless otherwise indicated, references in this report to “we”, “us” or “our” refer to CompX International Inc. and its subsidiaries, taken as a whole.

 

- 8 -


Note 2 – Business segment information:

 

 

Three months ended

 

 

March 31,

 

 

2013

 

 

2014

 

 

(In thousands)

 

Net sales:

 

 

 

 

 

 

 

Security Products

$

18,974

 

 

$

22,964

 

Marine Components

 

2,479

 

 

 

2,817

 

Total net sales

$

21,453

 

 

$

25,781

 

 

 

 

 

 

 

 

 

Operating income:

 

 

 

 

 

 

 

Security Products

$

3,193

 

 

$

4,699

 

Marine Components

 

(110

)

 

 

(16

)

Corporate operating expenses

 

(1,649

)

 

 

(1,395

)

Total operating income

 

1,434

 

 

 

3,288

 

Interest income

 

16

 

 

 

5

 

Interest expense

 

(59

)

 

 

-

 

Income before taxes

$

1,391

 

 

$

3,293

 

 

 

Intersegment sales are not material.

 

Note 3 – Accounts receivable, net:

 

 

December 31,

 

 

March 31,

 

 

2013

 

 

2014

 

 

(In thousands)

 

Accounts receivable, net:

 

 

 

 

 

 

 

Security Products

$

7,813

 

 

$

11,544

 

Marine Components

 

849

 

 

 

1,312

 

Allowance for doubtful accounts

 

(128

)

 

 

(139

)

 

 

 

 

 

 

 

 

Total accounts receivable, net

$

8,534

 

 

$

12,717

 

 

 

Note 4 – Inventories, net:

 

 

December 31,

 

 

March 31,

 

 

2013

 

 

2014

 

 

(In thousands)

 

Raw materials:

 

 

 

 

 

 

 

Security Products

$

2,565

 

 

$

2,320

 

Marine Components

 

1,000

 

 

 

504

 

Total raw materials

 

3,565

 

 

 

2,824

 

Work-in-process:

 

 

 

 

 

 

 

Security Products

 

5,992

 

 

 

8,342

 

Marine Components

 

704

 

 

 

1,245

 

Total work-in-process

 

6,696

 

 

 

9,587

 

Finished goods:

 

 

 

 

 

 

 

Security Products

 

2,349

 

 

 

1,751

 

Marine Components

 

625

 

 

 

969

 

Total finished goods

 

2,974

 

 

 

2,720

 

Total inventories, net

$

13,235

 

 

$

15,131

 

- 9 -


 

 

Note 5 – Other noncurrent assets:

 

 

December 31,

 

 

March 31,

 

 

2013

 

 

2014

 

 

(In thousands)

 

Assets held for sale

$

532

 

 

$

532

 

Other

 

41

 

 

 

21

 

Total other noncurrent assets

$

573

 

 

$

553

 

 

 

Note 6 – Accounts payable and accrued liabilities:

 

 

December 31,

 

 

March 31,

 

 

2013

 

 

2014

 

 

(In thousands)

 

Accounts payable

$

1,452

 

 

$

4,264

 

Accrued liabilities:

 

 

 

 

 

 

 

Employee benefits

 

6,788

 

 

 

3,541

 

Customer tooling

 

388

 

 

 

359

 

Taxes other than on income

 

378

 

 

 

448

 

Insurance

 

243

 

 

 

238

 

Professional

 

86

 

 

 

235

 

Other

 

370

 

 

 

400

 

Total accounts payable and accrued liabilities

$

9,705

 

 

$

9,485

 

 

 

Note 7 – Provision for income taxes:

 

 

Three months ended

 

 

March 31,

 

 

2013

 

 

2014

 

 

(In thousands)

 

Expected tax expense, at the U.S. federal statutory

   income tax rate of 35%

$

487

 

 

$

1,153

 

State income taxes and other, net

 

9

 

 

 

 

Total income tax expense

$

496

 

 

$

1,153

 

 

 

Note 8 – Financial instruments:

The following table presents the financial instruments that are not carried at fair value but which require fair value disclosure:

 

 

December 31,

 

 

March 31,

 

 

2013

 

 

2014

 

 

Carrying

 

 

Fair

 

 

Carrying

 

 

Fair

 

 

amount

 

 

value

 

 

amount

 

 

value

 

 

(In thousands)

 

Cash and cash equivalents

$

38,753

 

 

$

38,753

 

 

$

35,049

 

 

$

35,049

 

Accounts receivable, net

 

8,534

 

 

 

8,534

 

 

 

12,717

 

 

 

12,717

 

Accounts payable

 

1,452

 

 

 

1,452

 

 

 

4,264

 

 

 

4,264

 

- 10 -


 

 

Due to their near-term maturities, the carrying amounts of accounts receivable and accounts payable are considered equivalent to fair value.

 

 

 

 

- 11 -


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.

- 12 -


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.

- 13 -


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.

- 14 -


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,

- 15 -


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.

 

ITEM  3.

QUANTITATIVE AND QUALITATITVE DISCLOSURES ABOUT MARKET RISK.

We are exposed to market risk from changes in interest rates and raw material prices. There have been no material changes in these market risks since we filed our 2013 Annual Report, and we refer you to Part I, Item 7A – “Quantitative and Qualitative Disclosure About Market Risk” in our 2013 Annual Report. See also Note 8 to the Condensed Consolidated Financial Statements.

 

ITEM  4.

CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures. We maintain a system of disclosure controls and procedures. The term “disclosure controls and procedures,” as defined by regulations of the SEC, means controls and other procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit to the SEC under the Securities Exchange Act of 1934, as amended (the “Act”), is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit to the SEC under the Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions to be made regarding required disclosure. Each of David A. Bowers, our Vice Chairman of the Board, President and Chief Executive Officer, and James W. Brown, our Vice President, Chief Financial Officer and Controller, have evaluated the design and operating effectiveness of our disclosure controls and procedures as of March 31, 2014. Based upon their evaluation, these executive officers have concluded that our disclosure controls and procedures are effective as of the date of such evaluation.

Internal Control Over Financial Reporting. We also maintain internal control over financial reporting. The term “internal control over financial reporting,” as defined by regulations of the SEC, means a process designed by, or under the supervision of, our principal executive and principal financial officers, or persons performing similar functions, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP, and includes those policies and procedures that:

pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets,

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors, and

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our Condensed Consolidated Financial Statements.

Changes in Internal Control Over Financial Reporting.  During the first quarter of 2014, we implemented a new enterprise resource planning system covering financial, production and logistics processes.  We believe we have maintained appropriate internal control over financial reporting during the implementation period.  There has been no other change to our internal control over

- 16 -


financial reporting during the quarter ended March 31, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

- 17 -


Part II. OTHER INFORMATION

 

ITEM  1A.

Risk Factors.

Reference is made to the 2013 Annual Report for a discussion of the risk factors related to our businesses. There have been no material changes in such risk factors during the first three months of 2014.

 

ITEM  6.

Exhibits.

 

Item No.

  

Exhibit Index

31.1

  

Certification

 

31.2

  

Certification

 

32.1

  

Certification

 

101.INS

  

XBRL Instance Document

 

101.SCH

  

XBRL Taxonomy Extension Schema

 

101.CAL

  

XBRL Taxonomy Extension Calculation Linkbase

 

101.DEF

  

XBRL Taxonomy Extension Definition Linkbase

 

101.LAB

  

XBRL Taxonomy Extension Label Linkbase

 

101.PRE

  

XBRL Taxonomy Extension Presentation Linkbase

We have retained a signed original of any of the above exhibits that contains signatures, and we will provide such exhibit to the Commission or its staff upon request. We will also furnish, without charge, a copy of our Code of Business Conduct and Ethics, and Audit Committee Charter, each as adopted by our board of directors on February 22, 2012 and March 2, 2011 respectively, upon request. Such requests should be directed to the attention of our Corporate Secretary at our corporate offices located at 5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240.

 

 

 

- 18 -


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 COMPX INTERNATIONAL INC.

 

 

 

 (Registrant)

Date:

 May 7, 2014

 

 

By: 

/s/ James W. Brown

 

 

 

 

James W. Brown

 

 

 

 

Vice President, Chief Financial Officer and Controller

 

 

- 19 -

 

Exhibit 31.1

CERTIFICATION

I, David A. Bowers, certify that:

1)

I have reviewed this quarterly report on Form 10-Q of CompX International Inc.;

2)

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3)

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4)

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting  principles;

c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5)

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a)

All significant deficiencies in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:  May 7, 2014

 

By:

 

/s/David A. Bowers

 

 

David A. Bowers

 

 

Vice Chairman of the Board, President

 

 

and Chief Executive Officer

 

 

 

Exhibit 31.2

CERTIFICATION

I, James W. Brown, certify that:

1)

I have reviewed this quarterly report on Form 10-Q of CompX International Inc.;

2)

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3)

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4)

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 13d-15(f)) for the registrant and have:

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting  principles;

c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5)

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a)

All significant deficiencies in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: May 7, 2014

 

By:

 

/s/James W. Brown

 

 

James W. Brown

 

 

Vice President, Chief Financial Officer

 

 

and Controller

 

 

(Principal Accounting and Financial Officer)

 

 

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of CompX International Inc. (the Company) on Form 10-Q for the period ending March 31, 2014 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, David A. Bowers, Vice Chairman of the Board, President and Chief Executive Officer of the Company and I, James W. Brown, Vice President, Chief Financial Officer and Controller of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

 

By:

 

/s/David A. Bowers

 

 

David A. Bowers

 

 

Vice Chairman of the Board, President and
Chief Executive Officer

 

 

 

By:

 

/s/James W. Brown

 

 

James W. Brown

 

 

Vice President, Chief Financial Officer and Controller

Date: May 7, 2014

Note:  The certification the registrant furnishes in this exhibit is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section.  Registration Statements or other documents filed with the Securities and Exchange Commission shall not incorporate this exhibit by reference, except as otherwise expressly stated in such filing.