SEC Filing Html Data
November
20, 2009
U.S.
Securities and Exchange Commission
100 F
Street, N.E.
Mail Stop
4631
Washington,
D.C. 20549
Attention: Mr.
Terence O’Brien, Accounting Branch Chief
Division
of Corporation Finance
CC: Ms.
Tracey Houser, Staff Accountant
Division
of Corporation Finance
Mr. Edward M. Kelly, Senior Counsel
Division
of Corporation Finance
Ms. Pamela A. Long, Associate Director
Division
of Corporation Finance
RE: CompX
International Inc.
Form 10-K for the Fiscal Year Ended
December 31, 2008, Filed February 26, 2009
Forms 10-Q for the Fiscal Quarters
Ended March 31, 2009 and June 30, 2009
File No. 1-13905
Dear Mr.
O’Brien
Reference
is made to the Staff’s letter dated October 27, 2009, (the “Comment Letter”),
which sets forth comments of the Staff regarding the above referenced Form 10-K
and Forms 10-Q of CompX International Inc. (“CompX). CompX has responded to the
Comment Letter as follows. The responses are numbered to correspond
to the numbers of the Comment Letter.
Form 10-K for the Fiscal
Year Ended December 31, 2008
Item 7 – Management’s
Discussion and Analysis of Financial Condition and Results of Operations, page
15
Critical Accounting Policies
and Estimates, page 16
Goodwill and other
intangible assets, page 16
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1.
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We
note that in addition to testing the Furniture Components reporting unit’s
goodwill for impairment at the annual testing period in the third quarter,
you also tested this reporting unit’s goodwill for impairment during the
fourth quarter of fiscal year 2008 and the second quarter of fiscal year
2009. In future filings, please provide investors with a more
specific explanation as to why you needed to test Furniture Components’
goodwill for impairment at an interim date. For example,
disclosure that states an interim testing was required because actual cash
flows would also fall below estimated cash flows, if correct, provides
investors with a better understanding as to why management was required to
test goodwill for this reporting unit at an interim
date.
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In our
future filings with the Commission, to the extent we test the goodwill
associated with any of our reporting units for impairment at an interim date, we
will include a more detailed discussion of the reasons that led management to
conclude such an interim impairment test was required (e.g. sales and operating
income for a reporting unit falling materially below our projections, or a
reporting unit that has generated significant negative cash flows or operating
losses for a sustained period). For example, in our Quarterly
Report on Form 10-Q for the quarter ended June 30, 2009, we note that we tested
our Furniture Component reporting unit’s goodwill “due to continued unfavorable
economic conditions and lower than expected results.” In our future
filings with the Commission, we would clarify that “lower than expected results”
refers to actual sales and operating income falling materially below our
projections for the reporting unit. We did not specifically include
any of these disclosures in our Quarterly Report on Form 10-Q for the quarter
ended September 30, 2009, as we completed our annual goodwill impairment
analysis during this quarter (i.e. the impairment analysis we most recently
completed was not an interim impairment analysis).
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2.
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To
the extent that the estimated fair value of any of your reporting units
does not significantly exceed the carrying value, please disclose the
percentage by which fair value exceeds the carrying value as of the most
recent step one testing date. For those reporting units, please
also provide a more detailed discussion of the degree of uncertainty
associated with the key assumptions used in the cash flow
analysis. An example would be to discuss when your cash flow
analysis assumes recovery from the current downturn within a defined
period of time. In addition, please discuss the potential
events and/or changes in circumstances specific to the reporting unit that
could reasonably be expected to negatively affect the key
assumptions. Please refer to Item 303 of Regulation S-K and
Sections 216 and 501.14 of the Financial Reporting Codification for
guidance. Please provide us with the disclosures you intend to
include in future filings.
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In our
future filings with the Commission, to the extent the estimated fair value of
any of our reporting units does not significantly exceed the carrying value of
such reporting unit, we will expand the quantitative disclosures regarding the
goodwill associated with such reporting unit to disclose (i) the percentage by
which the estimated fair value of such reporting unit exceeds our carrying value
of such reporting unit and (ii) the amount of goodwill we have recognized for
such reporting unit. We will also disclose the degree of uncertainty
associated with the key assumptions used in our cash flow analysis and potential
events and/or changes in circumstances that could reasonably be expected to
negatively impact such key assumptions by disclosing (i) the maximum percentage
by which our estimated future cash flows from operations less capital
expenditures for such reporting unit could decrease before it would be
reasonably likely to conclude an impairment of the goodwill associated with such
reporting unit would be present and (ii) the percentage increase in the rate
used to discount such cash flows that would reduce the enterprise
value for such reporting unit sufficiently to indicate a potential impairment
was present. Please see our Quarterly Report on Form 10-Q for the
quarter ended September 30, 2009 for such expanded disclosures regarding the
potential for a goodwill impairment at our Furniture Components reporting unit
in the “Segment Results – Outlook” section of our MD&A. We also
note that the estimated fair value of our remaining reporting unit with goodwill
at September 30, 2009, our Security Products reporting unit, exceeds the
carrying value of the reporting unit by a substantial amount.
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3.
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We
note your disclosure that no impairments of your long-lived assets were
identified during fiscal year 2008, including the other intangible assets
of your Marine Components reporting unit. We further note that
you tested the assets allocated to your Marine Components reporting unit
for impairment during the second quarter of fiscal year
2009. In future filings, please disclose the carrying value of
the assets tested for impairment as of the most recent testing date by
asset group. To the extent that undiscounted cash flows are not
materially different from the carrying value, please disclose the
percentage by which undiscounted cash flows exceeded the carrying value by
asset group. Please note that disclosure of the carrying values
the business units/asset groups that are generating negative cash flows
and are at risk for impairment should be disclosed. Otherwise,
there is a concern that investors may not understand the magnitude of your
material uncertainties. Please also provide investors with the
specific factors that could lead to material impairment charges for each
group of assets that are at-risk. Item 303 of Regulation S-K
requires MD&A disclosure of material uncertainties unless management
has concluded that the uncertainty is not reasonably likely to materially
impact future operating results. Potential asset write-offs
are, inherently, uncertainties over the recoverability of recorded assets
and require disclosure prior to the period of the impairment
charge. See the guidance in Sections 501.02 and 501.12.b.3 of
the Financial Reporting Codification, as well as in SAB
5:P.4. Also, Section 216 of the Financial Reporting
Codification states that “registrants have an obligation to forewarn
public investors of the deteriorating conditions which, unless reversed,
may result in a subsequent write-off. This includes an
obligation to provide information regarding the magnitude of exposure to
loss.”
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In our
future filings with the Commission, we will disclose the carrying value of each
asset group we tested for impairment as of the most recent testing date
(including any asset group which is generating negative cash
flows). In addition, to the extent the undiscounted cash flows
associated with such asset group are not materially different from the carrying
value of the asset group (and therefore such asset group would be at risk for a
possible future impairment charge), we will disclose (i) the maximum percentage
by which such undiscounted cash flows could decrease before we would conclude
recognition of a material impairment charge would be reasonably likely and (ii)
any material uncertainties or other specific factors that could cause such cash
flows to decrease and therefore lead to recognition of such material impairment
charge. For example, in our Quarterly Report on Form 10-Q for the quarter ended
September 30, 2009, we expanded our disclosures regarding the asset groups
within our Marine Components reporting unit which were tested for impairment,
including providing the asset carrying values of the asset groups tested for
impairment, in the “Segment Results – Outlook” section of our
MD&A. We also note that although the operating performance of our
Marine Components reporting unit has been below our expectations, the reporting
unit has generated positive cash flows in 2009.
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Results of Operations,
page 18
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4.
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We
note that foreign currency exchange rates positively impacted fiscal year
2009 operating income by $1.3 million, or 21%. In future
filings, please provide investors with an insight as to what caused you to
recognize foreign currency transaction gains in fiscal year 2008 as
compared to losses recognized in fiscal year 2007. In this
regard, we note your disclosure that the value of local currencies in
comparison to the U.S. dollar was strengthening in both fiscal
years.
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In our
future filings with the Commission, to the extent we recognize material foreign
currency transaction gains or losses in our results of operations, or to the
extent material changes in foreign currency exchange rates impacts the
comparability of our sales and operating income, we will discuss the factors
that we believe contributed to such items.
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5.
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In
future filings, please quantify the extent to which changes in sales
volumes and pricing changes impacted the net sales. Refer to
Item 303(A)(3)(iii) of Regulation S-K for guidance. Please also
quantify the impact other material factors had on net sales and the other
line items comprising income (loss) from continuing operations for each
period presented. For example, we note that the Security
Products’ net sales were impacted by lower order rates offset by sales
price increases for certain products without quantification. We
further note your discussion and analysis of gross margin on a
consolidated basis, in which you note fiscal year 2008 gross margin was
impacted by higher raw material costs, reduced fixed cost coverage from
lower sales volume, and lower depreciation expense without
quantification.
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Our
product offering consists of a significantly large number of products that have
a very wide variation in prices, which presents certain practical limits to
specifically quantifying the impact of changes in volume versus price on net
sales. However, to the extent practical, in our future filings with
the Commission, we will revise our Management’s Discussion and Analysis to
include a quantification, for each of our three business segments, of the
estimated impact resulting from changes in our sales volume and selling
prices. We will also clarify in our future filings the difficulties
in providing a quantification of the impact of changes in volume versus price on
our net sales, given that our product offering consists of a significantly large
number of products that have a very wide variation in
prices. Additionally, we will include quantification of the impact of
changes in raw material costs, fixed charge coverage and depreciation expense,
to the extent such changes are material.
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6.
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We
note your discussion and analysis of raw material costs on page
20. In future filings, please enhance this disclosure to
provide investors with a more detailed understanding of the variability in
the costs of your most significant raw materials (i.e., coiled steel,
plastic resins, zinc, and stainless steel). In this regard, we
note that your raw material costs represent over half of cost of goods
sold and the variability has been noted as a cause for the decline in your
gross margins. Further, please explain the extent to which the
use of raw material supply arrangements impacted your operating results,
as we note your statement that these arrangements allow you to stabilize
raw material purchase prices to a certain extent. Refer to
Items 303(A)(3)(i)-(ii) of Regulation S-K and Section 501.12.b.3-4 of the
Financial Reporting Codification for
guidance.
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In our
future filings with the Commission, we will include a more detailed discussion
of the variability in the cost of our most significant raw materials (i.e.
coiled steel, plastic resins, zinc and stainless steel). In addition,
as discussed in Item 7A of our Annual Report on Form 10-K for the year ended
December 31, 2008, we occasionally enter into raw material arrangements to
mitigate a portion of the short-term impact of future increases in raw material
costs. We generally do not have long-term supply agreements for our
raw material requirements. In our future filings with the Commission,
to the extent we enter into any such raw material arrangements which materially
affect our cost of goods sold, we will discuss these arrangements.
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7.
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In
future filings, please provide a more detailed analysis of the factors
that impact the areas comprising your income (loss) from continuing
operations at the consolidated and reportable segment level, including a
complete discussion of known trends or anticipated trends that are and/or
may continue to have an impact on net sales, gross margins, operating
costs and expenses as a percentage of net sales, et
cetera. Your discussion and analysis is to provide investors
with sufficient information to understand the historical trends and the
expectations for the future as seen through the eyes of
management. For example, you note that the marine components’
gross margin decline from 27% to 21% due to reduced coverage of fixed
costs from lower sales volume. Given the significant impact the
decline in sales volume is not only having to net sales but also to gross
margin and operating income, your discussion and analysis should provide
investors with greater insight as to why you have been unable to reduce
the fixed costs in light of the significant decline in volume and the
specific steps management intends to take to reduce these
costs. In this regard, we note that the fixed costs for this
reportable segment remain a significant factor to the Marine Components’
operating results in the subsequent periods. Refer to Item
303(A)(3) of Regulation S-K and Section 501.12.b.3-4 of the Financial
Reporting Codification for
guidance.
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In our
future filings with the Commission, we will provide a more detailed analysis of
the factors that materially impact the areas comprising our income (loss) from
continuing operations at both the consolidated and reportable segment level,
including a complete discussion of known trends or anticipated trends that are
and/or may continue to have a material impact on our results of
operations.
With
respect to our fixed production costs, which we define as costs we incur
regardless of the level of our production volume, management has been able to
reduce such costs in light of the significant decline in our sales volumes, but
management has not been able to reduce such fixed costs by an amount sufficient
to fully offset the impact of the lower volumes. In our future
filings with the Commission, we will include a more detailed discussion of the
steps management has taken to reduce our fixed production costs to the extent
possible, and clarify that due to the nature of such fixed costs management has
not been able to reduce such fixed costs by an amount sufficient to fully offset
the impact of the lower volumes. In addition, to the extent our
facilities are operating at less than normal capacity, a portion of these fixed
costs, which under normal operating conditions would have been absorbed into
inventory, are expensed as incurred in accordance with ASC Topic
330-10-30. In our future filings with the Commission, to the extent
the amount of our unabsorbed fixed production costs are material, we will
quantify the amounts expensed in each period presented.
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Liquidity and Capital
Resources, page 23
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8.
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In
future filings, please disclose the amount of inventory for Furniture
Components and Marine Components given the significant decline in sales
volumes for each of these reportable segments, which could cause a
material uncertainty as to the realizability of inventory for these
reportable segments. Refer to Item 303(A)(3) of Regulation S-K
and Section 501.12.b.3-4 of the Financial Reporting Codification for
guidance.
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As
disclosed in the “Consolidated cash flows – Operating activities” section of the
MD&A included in our Quarterly Report on Form 10-Q for the quarter ended
September 30, 2009, our days in inventory has declined slightly from 71 days at
September 30, 2008 to 70 days at September 30, 2009. As our days in
inventory varies significantly across our three business segments, in our future
filings with the Commission, we will disclose the days in inventory by business
segment as well as disclose the amount of each inventory category (i.e. raw
materials, work in process and finished products) by business
segment. Additionally, if the realizability of inventory at one or
more of our segments becomes materially uncertain, we will disclose the nature
of the uncertainty. In this regard, we note that we do not believe
the realizability of our inventory for any of our segments was materially
uncertain at December 31, 2008, or any date subsequent thereto.
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Index of Financial
Statements, page F-1
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9.
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In
future filings, please either file a Schedule II – Valuation and
Qualifying Accounts as an exhibit and provide an audit report from your
independent public accountants covering the schedule, or include the
information required in your audited footnotes. Refer to Rules
5-04 and 12-09 of Regulation S-X for guidance. In this regard,
we note that your allowance for doubtful accounts ending balance as of
December 31, 2008 is 4.1% of accounts receivable less allowance for
doubtful accounts.
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In our
future filings with the Commission, we will include the information otherwise
required pursuant to Schedule II with respect to our allowance for doubtful
accounts in our audited consolidated financial statements (and footnotes
thereto) to the extent we have a material allowance for doubtful accounts, or
provision for doubtful accounts, in any period presented.
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We did
not include such information in our Annual Report on Form 10-K for the year
ended December 31, 2008 because we do not believe our allowance for doubtful
accounts, or our provision for doubtful accounts, was material for any period
presented in such Annual Report. With respect to our allowance for
doubtful accounts at December 31, 2008, we note that it was only $29,000 higher
as compared to December 31, 2007. The allowance for doubtful accounts
at December 31, 2008, as a percentage of total accounts receivable, was higher
as compared to such percentage at December 31, 2007 due primarily to the lower
overall total accounts receivable at December 31, 2008, consistent with the weak
level of our sales in the fourth quarter of 2008.
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Note 1 – Summary of
significant accounting policies, page
F-10
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Inventories and cost
of sales, page F-11
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10.
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In
future filings, please revise your accounting policy to state all material
methods of determining costs related to your inventories, including the
amounts of each major inventory category that each method relates along
with any other required disclosures for the corresponding cost
methods.
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In our
future filings with the Commission, we will revise our accounting policy related
to our inventories to disclose all material methods of determining cost for our
raw materials, work in process and finished products inventory, and provide any
required disclosures related to such cost methods.
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Goodwill and other
intangible assets; amortization expense, page
F-11
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11.
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In
future filings, please revise your disclosure to clarify that you assess
your other intangible assets (i.e., patents and trade names) for
impairment in accordance with the guidance in SFAS 144 rather than SFAS
142 as disclosed.
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Beginning
with our Quarterly Report on Form 10-Q for the quarter ended September 30, 2009,
we have adopted the Accounting Standards Codification and all such references to
SFAS have been updated with the appropriate ASC reference. With
respect to the indicated disclosure regarding impairment of other intangible
assets, we will make reference to the ASC section applicable to SFAS 144 in our
future filings with the Commission.
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Exhibits 10.1 and
10.10
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12.
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We
note the statements that some schedules, exhibits, annexes, and similar
attachments have not been filed and that CompX International will furnish
them supplementally to the Commission upon request. Unlike Item
601(b)(2) of Regulation S-K, there is no provision in Item 601(b)(10) of
Regulation S-K for excluding schedules or similar
attachments. Please revise in future
filings.
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We did
not file the schedules, exhibits, annexes and similar attachments to the
indicated Exhibits as we believe such schedules, exhibits, annexes and similar
attachments do not contain any additional information that is material in
relation to the documents that were filed as Exhibits. We also
concluded that the guidance of Exchange Act Rule 12b-31 would support such an
exclusion from filing.
In
response to the comment of the Staff in this regard, in our future filings with
the Commission we will include any material schedule, exhibit, annex or similar
attachment to any new document that we file as an Exhibit pursuant to Item
601(b)(10) of Regulation S-K.
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Exhibits 31.1 and
31.2
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13.
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Item
601(b)(31) of Regulation S-K specifies that the certification must be
exactly as set forth in the item. We note omission of the
phrase “and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)” in paragraph 4. We
note also the inappropriate inclusion of the word “we” immediately before
the word “have” I the same paragraph. File an amendment to the
Form 10-K containing full Item 9A disclosure and the company’s financial
statements. See interpretation 246.13 in the Regulation S-K
section of our “Compliance & Disclosure Interpretations” which are
available on the Commission’s website at www.sec.gov. Please
also address these omissions in future periodic
reports.
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As soon
as it is practicable, CompX will file a Form 10-K/A (Amendment No. 1) for its
fiscal year ended December 31, 2008 that will include (i) full Item 9A
disclosures and our financial statements and (ii) corrected wording of the
certifications pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
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* * * *
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CompX
International Inc. acknowledges
that:
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CompX
is responsible for the adequacy and accuracy of the disclosure in our
filings with the Commission;
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Staff
comments or changes to disclosure in response to Staff comments do not
foreclose the Commission from taking any action with respect to our
filings with the Commission; and
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CompX
may not assert Staff comments as a defense in any proceeding initiated by
the Commission or any other person under the federal securities laws of
the United States.
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If you
have any questions regarding our responses to the Comment Letter, please feel
free to call me at (972) 448-1413. I can also be reached via
facsimile at (972) 448-1408 or via email at dhalbert@compx.com.
Sincerely,
CompX
International Inc.
By: _/s/ Darryl R.
Halbert
Darryl R. Halbert,
Vice President, Chief Financial
Officer
and
Controller
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